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Tuesday, 09 January 2018

CMBS Defeasance Activity Nose Dives As Maturity Wall Is Hurdled

Only 413 CMBS loans with a balance of $5.9 billion were defeased, or replaced by government securities, last year through the end of November.

Commercial Real Estate Direct Staff Report

The dwindling size of the legacy CMBS market has had a profound impact on defeasance activity.

Only 413 CMBS loans with a balance of $5.9 billion were defeased, or replaced by government securities, last year through the end of November. That compares with the 1,013 loans totaling $15.4 billion that were defeased during the same period a year earlier.

While market conditions last year were prime for defeasance transactions, there just weren't that many loans to defease.

                                Defeasance Volume

defeasanceYEAREND

                                      Source: Commercial Real Estate Direct

Defeasance activity flourishes when interest rates are low and property values are high, as was the case last year. It's further bolstered when the difference between short- and long-term interest rates narrows - when the yield curve flattens. That, too, took place.

The big wave of defeasance occurred between 2013 and 2016, when some $70.6 billion of loans were replaced by government securities. That coincided with the CMBS wall of maturities.

"We're nearing the 10-year mark from the financial crisis," explained Dan Kahler, director of defeasance at Chatham Financial, a Kennett Square, Pa., advisory firm with a substantial defeasance business. "After the crisis, not a lot of CMBS was issued. With fewer maturities, we’re seeing fewer defeasances in the pipeline.”

Now that maturity volumes are declining, so are defeasance volumes. The expectation is that volume will remain steady, but muted. After all, only $12.1 billion of loans were securitized in 2008, $3.6 billion in 2009 and $11 billion in 2010.

The big variable, according to Eitan Weinstock of AST Defeasance Services of Los Angeles, is the expectation of dramatic...


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