Pierce Mayson
Vice President, Investment Sales
Atlanta
It was 2006 and 2007, and the commercial real estate world was ablaze. Loan originations spiked to $674 billion as the capital markets moved to facilitate the flutter of activity. But as the world turns toward the 10-year mark of these loans, the question remains – what portion of the 2006 and 2007 originations will see a positive outcome as it reaches maturity?
Forecasts from Moody’s call for the 10 year UST to rise at a moderate but steady pace, hitting 4% by the end of 2017. Given any unforeseen changes in the financial environment and barring any catastrophic political event, healthy growth in property income should ideally continue along with GDP growth. As a result, Moody’s suggests that a compound annual price growth of 3.2% should occur across the commercial property board from Q4’15 through Q4’17.
Considering current market values, original loan balances, and current debt market underwriting standards, one can cast a rough prediction as to the probable ease of refinancing certain loans over the next two years. Loans in the six major markets will intuitively have the fewest problems, with a suggested 0.5% having difficult refinancing scenarios and 14% requiring additional capital. In secondary and tertiary markets, however, price recovery has lagged behind the major markets. As a result, 6% of loans in these markets will face difficulty when it comes time to refinance and roughly half are predicted to require additional capital.
Turning to the retail sector, the outlook for owners is not as rosy. While Moody’s forecasts stronger growth in the retail sector (7.5%) over the next two years than the commercial average, retail has yet to make up as much ground since the downturn as have areas like the multifamily sector. Therefore, 47% of all retail loans, independent of location, are projected to face difficulty during the refinancing process, with 42% requiring a capital infusion.
CMBS Refinancing Outlook: Results Under a Static vs. a Forecast View
So what does all of this mean?
Commercial property values have experienced a notable turnaround from 2010 to 2015 with compound annual growth reaching 12% over that period. The recovery should be enough to enable the majority of loans issued in 2006 and 2007 to refinance in the next two years given that the underlying collateral is high enough to be able to refinance at current market rates. For a significant portion of loans, though – and especially in certain sectors like retail – a capital market solution will be required. Some borrowers will need to sell assets, potentially at prices that do not deliver their desired return. For the middle tier of assets, where prices have recovered but more capital is needed, there will certainly be opportunities in 2016 and 2017. Mezzanine financing and preferred equity partners will be required to help raise equity to levels which enable many properties to be refinanced, and in the secondary and tertiary markets, we will likely see many borrowers in potentially dire need of capital market assistance.
Top Borrowers Facing Loan Maturities in 2016 and 2017
Source: Real Capital Analytics
Written by Pierce Mayson, vice president of the Southeast Investment Sales team in Atlanta.