Even though the commercial real estate market has rebounded since the Great Recession, some of the exuberance that took place last decade is posing a looming threat in 2016 and 2017.
Ten-year loans made prior to the recession are coming due. Fortunately, the market and its values have recovered enough that many property owners will be able to refinance and others who can’t refinance will be able to sell and cover their loans. There are plenty of buyers waiting in the wings, analysts and brokers say.
Morningstar Credit Ratings this year estimated the payoff rate for commercial mortgage-backed securities (CMBS) for the $71 billion of non-defeased loans due in 2016 was 66.5 percent. That could drop below 60 percent in 2017, the service said.
All that assumes a loan with a loan-to-value ratio greater than 80 percent could not get refinanced without an infusion of equity. Without that added equity, properties could be sold or taken over by creditors.
Nevada is one of the lucky regions today. It was hit so hard by the Great Recession that many of the troubled properties have already been cleared from the system and resold years ago to owners who are profiting off them today.
“Most of the loans that have made it this long in Nevada can be refinanced or sold without the lending having to foreclose on the property,” said Kyle Nagy, director of CommCap Advisors, a Las Vegas-based commercial mortgage banking firm. “Vegas got hit so hard that if you’ve lasted this long in Nevada, they’re most likely able to sell or refinance without having to get the lender involved.”
Southern Nevada, however, is not without its problems based on the latest report from Trepp, LLC, the New York-based analytics firms that monitors the CMBS marketplace.
A $55 million note of Kimco PNP-Cheyenne Commons has been transferred to special servicing for “imminent monetary default.” Trepp reported a decline in occupancy rates that hurt cash flows for debt payments.
Cheyenne Commons is a 361,000 square-foot regional mall at 2190 N. Rainbow Blvd. Its occupancy rate in 2014 was 73 percent, down from 85 percent in 2012 and 97 percent in 2011. The losses included 24 Hour Fitness and Fashion Bug vacating when their leases expired. The main tenants, Walmart and Marshall’s, have leases that expire in 2017.
Trepp has listed 35 Southern Nevada properties with loans originated between 2005 and 2007 that are either delinquent or in special servicing. Most are office buildings, but there are some shopping centers, apartment complexes, industrial centers and one hotel.
Kimco PNP also has its Rainbow Promenade shopping center on the 2000 block of North Rainbow Boulevard listed among the 35.
In looking at the stats, there are a lot of distressed loans that will need to be paid off or refinanced between now and the end of 2017, said Sean Barrie, a research analyst with Trepp. Not every loan will be paid in full, but the trend in the number of delinquencies heading into 2017 is declining, he said.
“There’s some distress in the area that still needs to be solved,” Barrie said. “It’s definitely an effect of what happened 10 years ago, and now that they mature today, tomorrow and next year, not everyone will have performed perfectly. It’s definitely not some crisis stage. Vegas is doing much better than years ago. Delinquencies on properties are way down, and they continue to dwindle every year. In 2006 and 2007, all of those loans were priced at such huge valuations that they didn’t deserve to be. The market is more disciplined now where they properly price the properties and assign right value to the loans.”
Much of the trouble passed four to five years ago, Barrie said. Among the five-year loans made prior to the recession that came due by 2012, many had trouble refinancing at the time because of the way the loans were structured, he said.
“It’s a different era compared to what happened in 2008,” Barrie said. “There aren’t as many that are so far gone that they have to be sold and the loans will be a total loss.”
Nagy said his company worked on many loans from 10 years ago that are coming due. The refinance rate in 2016 is higher than the refinance rate in 2015, which means that the loans done in 2005 that matured in 2015 had a lower probability to refinance than those maturing in 2016, Nagy said. The reason is market conditions have improved enough with interest rates at historic low levels, he said.
“When interest rates are low, income-producing properties qualify for higher loan amounts, and when you qualify for higher loan amounts, you’re more likely to refinance,” Nagy said. “I don’t think they will default because the values have increased beyond the balance of their loans. They were defaulting when they couldn’t refinance or sell.”
That ability to sell is available to them because of the increase in values, Nagy said.
“They may not get a great return or even a return of their original equity, but they’re able to sell without defaulting on the loan,” Nagy said. “I think the greater percentage can be refinanced this year compared to last year, but that’s not for everyone. There will be a portion of the market that is passed due to refinance and will have to sell.”
As an example, Nagy said someone who did their loan 10 years ago on a property of $10 million would have gotten a loan of $7.5 million or 75 percent loan to value. Today, that property might be worth only $9 million and based on the same 75 percent loan to value, that would come to $6.75 million. In order to refinance the loan, the owner would have to come up with $750,000 million out of their pocket, he said.
“Not everybody can do that,” Nagy said. “Not everyone is willing to do that, but they can still sell it for more than $7.5 million, which means they won’t have to default. I see a lot of people selling because they want off the ride. They watched their properties decline in value, they saw their loans struggle, and they worried about making their payments. Now the market justifies a sale without them coming out of their pocket, and a lot of people want off the roller coaster.”
Rod Martin, vice president of Majestic Realty Co., said what makes the situation not look as bad today is cap rates and lease rates have improved since 2011 and 2012 when many five-year loans came due.
“That’s when people were sunk because the values weren’t there and nobody had any cash because they had five years of sucking wind and that’s when refinancing was very difficult,” Martin said. “Now that we are getting into that 10-year term, someone that has towed the line for 10 years will not give up easily. They will seek every financing vehicle out there. If it’s CMBS loans or mezzanine finance, as long as it’s there, they will find it.”
The properties that are still troubled today were leveraged beyond a normal capacity where selling or refinancing doesn’t solve their problem, Nagy said. The rents haven’t returned to 2006 levels in all property types, and until they do, it’s hard to refinance unless the value is there, he said.
Many of the people who bought properties immediately after the recession did so at a low enough price that they’re “doing very well” and financing today at favorable rates, Nagy said. Some who bought in 2008 and 2009 thought they were buying at the bottom but the market continued to fall for two years after that, he said.
“Almost all property types are performing above 2011 and 2012 numbers,” Nagy said. “If you got in later in 2014 and 2015 hoping for a big spike, maybe it’s not there.”
Multifamily and industrial properties are performing the best in the market in terms of values and rents rebounding. Office is at the bottom of the market and retail properties are somewhere in the middle, analysts say.
“The ones that were ill-conceived and probably should not have been built because the surrounding services are not there yet are those that are struggling,” Nagy said. “There were ones built on the come line hoping that new homes or new restaurants would be built in the area and never were.”
Those properties will sell for a discount or be let go and have the servicer sell it for a discount, analysts say.
“In this market, I don’t think finding buyers is a problem,” Nagy said. “Brokers are doing a great job of bringing properties to market and finding buyers.”