Fitch sees stressed conditions for almost 25% of 2023 CMBS, agency maturities

A new report from Fitch Ratings sees refinancing hurdles for about 23 percent of commercial mortgage-backed securities and agency loans maturing through the end of 2023 as rising interest rates have a residual impact on sponsors’ ability to line up new financing.

The November 3 Fitch Ratings report says the New York-based agency data showed nearly $26.5 billion of non-defaulted and non-defeased conduit and agency loans in Fitch-rated US CMBS multiborrower transactions will mature by the end of next year, accounting for nearly 6 percent of the Fitch-rated conduit and agency universe by balance.

Fitch analysts Melissa Che and Sarah Repucci noted the weighted average coupon of 4.7 percent for these loans is well below current market rates ranging from 6.5-7 percent.

“Our assessment of three plausible scenarios determined the majority would be able to refinance,” the report stated. “However, about 23 percent ($6.2 billion) of the maturing volume would not be able to refinance under any of the scenarios.”

Fitch stress-tested various levels of debt service coverage ratio and loan-to-value parameters to secure refinancing at prevailing market interest rates and capitalization rates. “Our analysis shows 65 to 68 percent of the maturing loan volume is able to satisfy the two DSCR scenarios, based on a threshold of 1.25x for an amortizing loan and 1.40x for an interest-only loan, while 72 percent are able to satisfy the maximum 75 percent LTV scenario and secure refinancing based on current market cap rates by the American Council for Life Insurers,” Che and Repucci said.

Fitch’s first scenario assumed a current 10-year mortgage rate of 6.75 percent and a 30-year amortization schedule. The second scenario assumed interest-only payments at a current 10-year mortgage rate of 6.75 percent. Scenario three assumed loans with a maximum LTV threshold of 75 percent would be able to refinance based on current property-type specific market cap rates informed by ACLI of between 4.75 and 10 percent.

Sector split

Of the conduit loans maturing by year-end 2023, 30.3 percent are focused on retail, 21.9 percent on multifamily, 20.8 percent on office and 11.5 percent on hotel. Fitch said $4.3 billion of the multifamily maturing volume consists of Freddie Mac loans, which carry a lower WAC of 3.97 percent compared to conduit multifamily loans of 4.74 percent.

“Freddie Mac mortgages perform slightly better under the refinancing scenarios than conduit mortgages,” Fitch said. Che and Repucci noted the sector currently benefits from high mortgage rates and prices for single-family homes, which has made tenants rent longer. “However, with incomes generally failing to keep pace with inflation and selective hiring freezes and layoffs in the tech sector, multifamily rent growth will slow, particularly in large urban multifamily markets.”

For retail, Fitch said the refinancing risk is apparent. “Retail continues to face ongoing secular challenges, with a bifurcation of asset performance trends among the sub-categories and by property quality,” Che and Repucci said. “Needs-based grocery and big-box retail centers, comprising the bulk of the anchored and shadow anchored exposure, performed well, relative to struggling class B and C malls.”

The firm said it does not anticipate the bulk of the class B and C regional mall exposure to refinance at maturity because of continued performance challenges, liquidity pressures and overall negative market sentiment.

The office and hotel sectors are still facing favorability problems first encountered at the start of the covid-19 pandemic when the US office workforce went remote and travel took a nosedive.

For the office sector, Fitch said some of the underperforming loans and lower quality properties at risk of obsolescence will face difficulty in refinancing. Medical office notably is expected to be more resilient under the firm’s stress scenarios.

Fitch noted recession, a new coronavirus surge or persistent inflation could further dampen the hospitality sector’s return to pre-pandemic performance. So far that has gone well in 2022 though high gas prices and airfares were presenting challenges alongside reduced flights, increased labor costs and staffing shortages.