The U.S. investment market totaled $6.2 trillion in 2015, with 57.3 percent of the figure comprising debt-based investment assets and the remainder accounted for by equity-based properties. On the debt side, chartered depository institutions (banks) accounted for the bulk of capital providers, with about half the total market holdings. The second largest share of debt holders was represented by commercial mortgage backed securities (CMBS), collateralized debt obligations (CDOs), and other asset backed securities (ABS) holders, making up 18.0 percent of total, based on data from the Federal Reserve.
Commercial mortgage backed securities (CMBS) issuance rose dramatically from $94 billion in 2004 to $168 billion in 2005 and hit a peak of $230 billion in 2007. Originations dropped dramatically in 2008 and 2009 during the market crash, but have rebounded. In 2015, CMBS issuers offered $101.0 billion in commercial bonds. As of the first quarter of 2016, bond issuers have been impacted by financial markets’ volatility. Domestic CMBS issuance was down 29.6 percent in the first quarter, with a total of $19.0 billion.
Many of the loans issued during the 2005-07 period, and repackaged, were 10-year loans, which have been coming up for refinancing in 2015 – 2018. According to Trepp, about $205 billion in commercial loans are scheduled to mature over the 2016-18 period.
The majority of the loans are for office and retail assets, which have recorded slower comparative recoveries in fundamentals post-recession. Office vacancies still hover around the 14.0 percent mark. Retail fundamentals have made noticeable strides over the past two years with vacancies down to 5.6 percent in the first quarter of this year.
In terms of volume, $87.1 billion of CMBS is expected to mature in 2016, with an additional $105.8 billion in 2017. Maturing bonds will drop to $12.8 billion in 2018. Commercial investors have expressed concern over the large wave of refinancing coming due, in light of the potential for rising interest rates. However, according to Trepp, strong CRE fundamentals have led to a decline in delinquency to 5.1 percent. Trepp considers that, even in a rising rate environment, it would take significant hikes to trigger default concerns.
How do commercial REALTORS® find this challenge impacting their markets?
Based on the Commercial Lending Trends 2016 report, CMBS loans made up only two percent of capital in REALTORS® markets, a figure which is consistent over the past few years. In turn, as market conditions have improved over the past few years, asset valuations have risen in tandem with net operating income (NOI). Commercial REALTORS® reported that NOI for properties they sold or leased increased in 57 percent of markets.
As lending conditions eased, the share of transactions failing due to refinancing has been on a downward trend. Refinancing difficulties caused deal failures in 50 percent of transactions during 2012. The share dropped to 42 percent in 2013 and 21 percent in 2014. Based on REALTORS® latest data, refinancing failures dropped to a low of 15 percent.
Based on commercial members’ feedback, the average DSCR provided a silver lining this year, with an average of 1.4x. The DSC ratio was reported at 1.3x percent in 2012, and 1.4x percent in both 2013 and 2014. With the ratio slightly higher than the 1.2x minimum and the Federal Reserve being cautious about a rate hike, maturing debt in commercial REALTORS® markets has a certain degree of buffer over the next couple of years.
For more information and the full report, access NAR’s Commercial Lending Trends 2016 at http://www.realtor.org/reports/commercial-lending-trends-survey.