This is the first of 10 articles taking an updated look at our most widely read stories of the year.
One year down, two more to go. Thanks to persistently low interest rates and rising property values, sponsors had little trouble refinancing the wall of commercial mortgage debt maturing this year.
The payoff rate of 2005 vintage loans has been, by anyone’s standards, better than expected. Morningstar reckons that 84.3% of the $100 billion coming due in this year had paid off by the end of September. There’s another $200 million of loans maturing over the next two years — approximately $10.78 billion in the fourth quarter of 2015, another $86.46 billion in 2016 and $103.02 billion in 2017.
These approaching due dates have been the cause of much hand wringing. But property valuations in many parts of the country have recovered to pre-crisis levels and in some cases exceed them. Moreover, there is ample financing from banks and insurance companies as well as CMBS conduits.
“People talked about the maturity wave for quite some time, but as we enter 2016, conditions are fairly stable and we expect a fairly good year unless the economy slips into recession,” said Darrell Wheeler, head of global structured finance at Standard & Poor’s.
In August, national commercial real estate prices climbed another 1.6%, per the most recent Moody’s Investors Service/RCA CPPI data. Year-to-date price appreciation reached 10.8%, for an annualized pace of just over 16%. As a result, borrowers are increasingly able to roll over loans obtained a decade ago, as coverage ratios and loan-to-value ratios (LTV) permit refinancing.
Things have been so good that even 2006 and 2007 vintage loans, which mature in 2016 and 2017, respectively, have been paid off early.
“Borrowers are taking advantage of the low rates to defease or take out loans in those vintages that are considered most volatile,” said Tom Cloutier, a director and research analyst at Conning, an investment management company that caters to insurers.
“Even a large pipeline of loans in the REO and foreclosure buckets for quite some time have been able to finally liquidate/recapitalize as we’ve seen a huge run up and recovery in CRE prices over the last couple of years,” he said.
Cloutier pointed to the high profile pay down of the Stuyvesant Town-Peter Cooper Village as an example. The loan, $3 billion of which is diced up into five CMBS issued in 2007, went into default in 2010 and the property was transferred to a group of lenders. In October of this year, these lenders reached an agreement to sell the 11,241-unit complex for $5.3 billion – enough to make all of its CMBS investors whole, according to Trepp.
But the overall market’s refinancing of 2005 vintage loans and defeasance of some large 2006 and 2007 loans doesn’t necessarily indicate a drop in the default rate, which has been hovering just above 13%.
That’s because what is left is an adverse selection of loans issued between 2005-2007, when commercial real estate valuations were at their pre-crisis peak. John Murphy, a director and research analyst at Conning, said defaults are unlikely impact holders of super senior tranches of deals, which benefit from 30% subordination, but mezzanine bonds of legacy deals could be impacted.
Another trend that is expected to continue is the removal of trophy assets from conduit pools. These properties, which have recovered the most in value, are being refinanced by insurance companies, rather than conduit lenders, said Murphy. Insurers are holding the loans on their books, which explain why 2015 deals are often sized under $1 billion, compared with an average of $3 billion for 2007 vintage conduits.