Nov 12
22
Are Commercial Real Estate Loans on the Verge of Imploding?
Is the Commercial Real Estate Market a Ticking Time Bomb?
Commercial real estate loans generally have provisions which require borrowers to pay off their loans or refinance them by a certain date which typically is within 5 or 10 years of initial funds disbursement. By 2013, $1.3 trillion in real estate loans will be due from property borrows such as for offices, hotel, shopping centers, multifamily homes, self-storage and industrial properties. Nearly half of the maturing multifamily and commercial debt will not qualify for refinancing according to Deutsche Bank, which means that two-thirds of CMBS debt will no longer be qualified or eligible to refinance. This will result in losses of over $50 billion dollars in securitized commercial loans and $200 billion dollars on commercial real estate loans, which will, again, effects commercial real estate financing.
Many governmental organizations are considering different options which would provide incentives to banks in order to extend the due date of commercial real estate loans to reduce the damage done to the market. The Federal Reserve and Treasury Department are among the top organizations looking to handle this situation. If corrective measures aren’t taken, we’ll be looking at more bankruptcies, more bank losses and decreasing commercial real estate value.
Sales prices are down nearly 44% and with increasingly high vacancies and hard guidelines, even the strongest commercial mortgage refinance applicants have a tough time refinancing the terms of their loans. With an increase in vacancies, many commercial properties are forced to make their own payments with vacancies expected to reach 17% for office space and 13.5% for retail.
Another problem the market is facing is an almost inevitable inflation which would lead to higher rents and potentially more income to service the debt–unless cash-strapped tenants leave either on their own volition or due to eviction due to lease payment delinquency. But that’s not the only problem. Commercial lenders were lending up to 90% of a properties’ appraised value. Cap rates would continue to fall and rent would continue to rise, which would serve as justification for leveraging properties even more, which could eventually lower debt service coverage ratios and property values. Lenders today are underwriting to lower loan to value ratios, or LTV which prevents less liquid borrowers from refinancing.
Although losses on commercial loans are low today (relatively), the increase in delinquent payments, lower consumer spending and high vacancies could mean that we may see trouble brewing. The current residential delinquencies are settling around 7% which puts in perspective the concern about the commercial real estate sector our country is now facing. In spite of all this, we remain optimistic in the resiliency of the commercial real estate loan market that will inevitably improve.