A Fairview Real Estate Solutions analysis of all 10-year commercial mortgage backed securities maturing from 2015 to 2017 shows less than 60 percent of all office CMBS is expected to payoff at par value. The remaining loans involve office properties that could be worth less than the original loan value and require additional capital. Others are expected to be in worse condition, having already been classified severely delinquent or in default.
Fairview’s analysis includes new underwriting of all existing CMBS in the U.S. by the firm’s team of analysts. The company is part of the QuietStream Financial portfolio of companies.
The analysis reveals what many have expected — that office properties financed at market highs in 2005 to 2007 have been slow to regain their former value. Many office buildings in primary urban markets have recovered, as well as some suburban areas and secondary cities. But many office properties in other locations have been slow recover.
“Office property defeasances have traditionally been third in overall transaction volume, behind Multifamily and Retail properties.” says Jeff Lee, chief operating officer for Defease with Ease. “Historically, loans averaging 68% LTV with a 1.50 debt coverage across all property types (data at origination of the current loan) have defeased; upon closing of the defeasance, the average debt coverage ratio typically increased .20 to 1.70. It’s no mystery that better performing assets have the capacity to absorb defeasance costs and some borrowers will face challenges. 20% of all defeased loans last year carried a debt coverage of 1.25 or less, which means certain struggling deals can still make sense for borrowers”
In 2015, 46 defeasance deals, accounting for nearly $1.3 billion in outstanding principal balance, have been completed to facilitate the refinance/sale and prepayment of office CMBS loans, according to Bloomberg data. All but two of those deals faced maturity dates in 2015, 2016 or 2017.
One encouraging sign emerged this week: CMBS upgrades outpaced downgrades for the first time in years.
“This is a huge positive development for the market,” QuietStream Financial CEO Robert Finlay says. “Everyone has been concerned about the equity in properties coming up against the Wall of Maturities. As we get closer to the 2016 and 2017 maturities, it’s really good to see values improving.”
While all CMBS categories from 2005 to 2007 could face some challenges, office properties shoulder the most difficult conditions as the wall of maturities approaches. Fairview’s research shows about 40 percent of all defaulted or severely delinquent CMBS maturing between now and 2017 are classified as office properties. By comparison, multifamily properties make up less than 10 percent of assets already in danger of default.
Fairview classifies CMBS loans in three groups: red, yellow and green. Loans in the red category are more than 5 percent underwater, already in default or severely delinquent. Loans classified yellow are estimated to be worth less than the original loan value or face a negative event that will negatively impact valuations, such as a major tenant moving out and no prospects to fill the space. CMBS in the green category are considered at no risk of maturing at subpar values.
Take a look at how office CMBS involved in the Wall of Maturities is faring: