According to reporting by Morningstar Credit Ratings LLC, commercial real estate mortgage borrowers with maturing loans paid them off at a slower rate as of May 2017. Peter Grant of the Wall Street Journal suggests this slower payoff rate, and the ensuing swell in delinquent/unpaid loans, can be at least partly attributed to 10-year mortgage loans taken out by borrowers in 2007, which got repackaged into commercial mortgage backed securities (CMBS). This mass of maturing debt, which many are referring to as the “Wall of Maturities,” is coming due and many people are concerned about the effect it may have on the real estate market, as well as the economy as a whole.
We all remember the mess that was created, and exacerbated, by the high risk lending that was prevalent across the country ten years ago. As a result, this increase in the amount of borrowers who were unable to repay their debt is far from unexpected. However, there are many who fear that, with today’s stricter lending standards, refinancing that debt may prove difficult for many, and impossible for some. Steven Jellinek, a VP from Morningstar Credit Ratings, affirmed that the real estate market has been reshaped in the years since 2007 by the internet and millennials in a way that borrowers would never have foreseen. For example, many retailers are struggling to adapt to the rise of e-commerce, which has in turn made it more difficult for them to refinance their loans in many cases.
Catherine Liu also reported the following data:
In the 12-month period between May 2016 and April 2017, $120.3 billion in securitized mortgage debt was liquidated. Based on underwritten maturity dates for loans that were scheduled to pay off during this time frame, 11,918 loans totaling $32.6 billion are still outstanding. Around $8.9 billion in CMBS loans that matured in April were paid off. A mere 4.34% of that was liquidated with losses, the lowest monthly level measured in the past year.
We will have to keep an eye on the CMBS market, and the commercial real estate market as a whole, throughout this year to see how this story develops, however, if history serves right, the savvy investor sees many opportunities based on this data.
