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Wednesday, 16 January 2019

Nearly $79Bln of CMBS Loans Come Due Through 2020

Some 31 percent of the loans set to mature between now and the end of next year are backed by hotels, while 19 and 22 percent are against office and retail properties, respectively.




By Catherine Liu, Trepp LLC

Considering the muted CMBS issuance activity during the recessionary years of 2009 and 2010, you could mistakenly expect an insignificant volume of mortgages to be coming due over the next two years.

Total domestic, private-label CMBS issuance declined to $2.8 billion in 2009 and $11 billion in 2010. That was a substantial drop-off from the $168 billion to $230 billion in CMBS loans issued annually between 2005 and 2007. Because most CMBS loans have 10-year terms, the potential volume of refinancing opportunities among existing securitized loans would appear slim.

However, thanks to the rising popularity of single-asset transactions, a sizable chunk of shorter-term, floating-rate deals with built-in extension options were completed in recent years. That has added bulk to the maturing load.

Based on a November snapshot, nearly $79 billion of CMBS debt will be up for refinancing between now and 2020, with $40.9 billion and $44.0 billion scheduled to pay off in 2019 and 2020, respectively.

While there's the opportunity, here's the risk: Loans against hotels—the property type that is most sensitive to cyclical and demand variability—account for 31 percent of the maturing volume.

Loans against retail, meanwhile, make up 22 percent, while office loans account for another 19 percent. A total of 34 percent of the loans that are coming due are in conduit deals, while 59 percent are in single-borrower transactions.

Underwriting Overview on Recent CMBS Originations


Coupon Rate %

Cap Rate %


Debt Yield %












































*Based on average securitized values on CMBS loans originated from June to December 2018

Source: Trepp LLC

Two years ago, Trepp analyzed the refinancing potential of CMBS loans that were scheduled to come due during the 2016 to 2017 "Wall of Maturities" period. To assess how these loans would fare, we examined whether they would pass certain refinancing thresholds based on prevailing capitalization rates, loan-to-value, debt-service coverage ratio and debt-yield requirements.

Given broad expectations of gradual interest-rate increases, we've updated our refinancing outlook for the next wave of CMBS maturities under various interest-rate scenarios.

We reviewed close to $27 billion of conduit loans that are scheduled to mature from now through 2020, removing all delinquent and fully-defeased assets from the universe, leaving us with a sample set of $20.3 billion.

Using average coupon and cap rates from loans originated between June and early-December of 2018, we calculated DSCR and appraised collateral values for maturing loans based on their current net operating incomes.

We assumed maturing loans would be taken out by loans that do not amortize and calculated appraised collateral values using average cap rates for recent loan originations. Those appraised values also were used to make loan-to-value calculations. As an additional test, current debt yields also were computed using most recently available NOI data and outstanding loan balances.

With these new loan performance metrics calculated, new DSCR and LTV figures then were determined according to several rate-hike assumptions. In the case of the debt-yield test, the threshold for qualifying for a full refinancing was increased by the assumed interest-rate increase. And we fine-tuned those criteria, based on lending trends specific to certain metropolitan statistical areas and property types.

In general, as interest rates increase, property values decrease and debt-service requirements increase, all other things remaining unchanged.

If rates stay where they are, 74.09 percent of loans, by balance, that are maturing through 2020 would pass their respective DSCR thresholds. And about 60 percent would meet or exceed their debt-yield requirements, while almost 64 percent would clear their LTV hurdles.

Cap Rate Distribution



Debt Yield Distribution


                                                                 Source: Trepp LLC

But if rates increase by 50 to 100 basis points, the volume of maturing CMBS loans that would meet each of the three tests would decline by between 4 percent and 15 percent from the aforementioned pass rates for each category.

A 100-bp increase would result in 13 percent of loans being eliminated from the "refinanceable" bucket in terms of DSCR, moving the total "pass" rate to just more than 60 percent.

Due to the lower rates on these maturing loans compared to those that were issued roughly a decade ago, they generally carry lower debt-service burdens, giving them a larger cushion on the DSCR front. Overall, the qualification results for the debt-yield and LTV thresholds were very similar across the various interest-rate assumptions. While the LTV test comes out as the slightly more restrictive of the two, both tests would see around a 50 percent pass rate under the highest interest-rate scenario.

DSCR Distribution



                                                                  Source: Trepp LLC

In the midst of an increasingly volatile macroeconomic backdrop, various factors could hinder the market's ability to digest the loan maturities. Spreads on CMBS, for instance, have widened, impacting that market's appetite for new originations. Meanwhile, annual NOI growth rates for properties securing existing CMBS loans have slowed, indicating that the commercial real estate market is, indeed, in the late stage of its cycle.

CMBS YoY NOI Growth & Issuance Volume


                                                                       Source: Trepp LLC

On a positive note, historical data has shown that increasing interest rates do not necessarily correspond to weakening property fundamentals. On the contrary, they're often an indicator of strong underlying demand and economic activity.

Comments? E-mail Catherine Liu or call her at (212) 754-1010.


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