Just a few short years ago, the talk of the industry was the massive number of CMBS loans that would mature through the end of 2017. Issuance in 2006 and 2007 reached record levels, and the fact that most of these loans had 10-year terms heightened anxiety for refinancing in a more conservative underwriting environment.
Two years ago, over $300 billion were set to mature by the end of 2017. Nearly 10% or approximately $30 billion are in the still in the state of some sort of resolution. Not all of these loans are considered distressed, however. About $9 billion is still outstanding and will mature the balance of this year.
Many observers of the CMBS market were concerned that the majority of maturing 2017 CMBS loans would face difficulty in refinancing. Despite low coverage and high LTV ratios, pay off rates for 2017 CMBS loans have held up remarkably well. In July, for instance, Morningstar Credit Ratings, LLC reported that nine of the ten largest high leverage CMBS loans–all with LTVs above 80%–paid off on time. The overall initial loan payoff rate increased to 78% in July from 65.8% in June.
Ample debt capital from a wide variety of lender sources has supported the refinancing of these loans. Banks have increased their appetite for permanent loans, and life companies have cherry picked the lower leveraged high quality deals. Debt funds seeking higher yields have taken out CMBS deals requiring higher leverage.
Additionally, a very active investor market has enabled some of these loans to be paid off with a sale of the property. Accretive leverage given a continued low rate environment has manufactured compelling cash on cash returns for many of these assets.
Despite the consternation and high anxiety that permeated markets just a few years ago, we seem to have avoided wide spread defaults given that the “wall of maturities” has now largely been absorbed in the marketplace.
By Brian Stoffers, Global President, Debt & Structured Finance, Capital Markets, CBRE.