Posted by: BayAreaComRE | January 21, 2010

Commercial Real Estate’s Elephant in the Room: CMBS and Loan Maturities

Rent is Lower. Vacancy is Higher. Unemployment is Higher. Yes, we all know this. These economic trends are commonplace jargon and affect companies and individuals alike. But the negative externalities of these economic factors bore by property owners, lenders and stock holders are causing serious concern. Loans that are maturing in the next few years have an increasing delinquency rate as well as CMBS (commercial mortgage backed securities).

What is in store in the immediate future? “Kicking the can down the road”

A major concern articulated by National Real Estate Investor (See full article here)  is lenders are putting a band-aid on the problem, compromising our economy’s stability. Furthermore, the highest percentages of extensions have occurred  in the past two years, just as delinquencies in both CMBS and maturing loans increase to record levels.

“According to Anderson, there are two likely scenarios. The rosiest picture entails banks extending the loans, adding to the next year’s already growing volume of underwater maturing loans.

The Armageddon scenario could go something like this: An unforeseen panic or event pressures banks and other lenders to unload problematic loans, taking hefty losses on maturing mortgages that are under water or otherwise unable to qualify for refinancing.”

When did we go wrong?

Over 63% of the delinquent unpaid balance through November 2009 came from transactions issued in 2006 and 2007, with nearly 36% of all delinquency found in 2007-issued transactions.  When we extend our review to include the 2005 vintage, an additional 15% of total delinquency is found; thus over 78% of CMBS delinquency comes from 2005 to 2007 vintage transactions.

What are the expert predictions?

Realpoint (See full report here) predicts that, “Based upon an updated trend analysis, we now project the delinquency percentage to grow to between 5% and 6% through the first quarter of 2010 (potentially heavily stressed scenarios through the mid-2010).

“In 2011, 49% of maturing loans will be under water, followed by 63% in 2012, 61% in 2013, and 57% in 2014. In all, from 2010 through 2014, the total amount of maturing loans expected to be under water is a whopping $770 billion.

BayAreaComRE will keep tracking this story and how it unfolds in the Bay Area.


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