“Extend and Pretend” Era Creates Heightened Challenges for CMBS Market Participants

Challenges facing the real estate market since the pandemic have spurred a shift in the path of commercial real estate finance. Historically, when a loan reaches maturity “a borrower repays their obligation in full or negotiates a new path forward” according to the report released in late August by Trepp, a provider of structured finance and commercial real estate data. Lingering challenges of increased vacancies faced by many property owners have led to “a growing share of commercial mortgage-backed securities (CMBS) loans” failing to “take that final bow at maturity.” As the era of “pretend and extend” continues, CMBS market participants face several challenges as loans are left to linger in limbo — the need to navigate a shifting landscape of higher interest rates, declining property values, and tighter credit conditions.” The analysis completed by Trepp focuses on “$133.2 billion of fixed-rate, private-label CMBS loans spanning conduit, large loan, and single-asset, single-borrower (SASB) deals that were scheduled to mature between January 2020 and April 2025,” finding that 34% of the loans, or $45.4 billion failed to be paid off at maturity. The percentage of unresolved principal during the analysis period is more than double the pre-pandemic norm when unresolved principal routinely hovered below 20% in many subsectors. Among the property types, office and retail sectors accounted for most of the failed payoff volume. Retail loans represented the largest share of matured volume overall among the $332.2 billion loans analyzed, with $47.4 billion in total, of which $16.5 billion, or 35% failed to pay off; while of the $36.7 billion in office loans, $14.7 billion, or 40% missed its payoff dealing — the highest non-payoff rate among major asset classes

Trepp’s analysis also revealed that “across nearly every property type, loans that successfully paid off exhibited higher median debt service coverage ratio (DSCR),” which is one of two metrics “widely used by lenders and investors to assess a borrower’s capacity to meet debt obligations and the property’s value relative to loan size.” In the example of retail and office loans, among the loans that paid off at or prior to maturity, median DSCRs were 1.65 and 1.73 respectively and median debt yields were in the mid-12% range. In contrast those loans that failed to pay off showed median DSCRs of a lower 1.51 in both sectors; and although it appears to be a “seemingly modest difference, it becomes more meaningful when paired with lower debt yields of 10.17% and 9.56% respectively.” For those loans that failed to pay off, the resolution time can stretch from quick to drawn-out distress.  An examination of the resolution status and median time to resolution for five property types — retail, office, lodging, mixed-use, and multifamily with over $1 billion in failed payoff volume revealed that regardless of property type loans that eventually paid off had a resolution time of two to four months and in the category of modified and extended loans, the median resolution time ranged from five to six months. However, in the category of loans that were resolved with a loss, the resolution time ranged from the shortest time of five months in the multifamily sector to 14 months in the office sector as foreclosure, property repossession (REO), or a negotiation of a loan discount are pursued

Source:    https://www.trepp.com/trepptalk/over-the-cre-maturity-wall-who-paid-who-didnt-what-followed