Nearly $900 billion of commercial real estate loans are set to mature in 2023 or 2024, according to a report.
A pessimistic picture of deal activity in the CRE space is painted by MSCI’s February 2023 Capital Trends US Big Picture Report, with transaction volume down 51 percent in February 2023 from 12 months before.
Furthermore, in introductory comments, the authors suggest they may not have been gloomy enough. After all, when they started work on this report, they say: “Silicon Valley Bank had not even failed yet.”
Even without dysfunctional banks, the report says that credit availability was retreating at the end of 2022 “with tightening standards and fewer unique loan operators winning deals”.
Those general observations help give context to the loan maturity wave. More than one-third of the loans set to mature this year had their origins in the market for commercial mortgage-backed securities. There is a straightforward reason for that: lenders who originated loans for that market were providing more loans than were any other lending group a decade ago, 2013-14. In the intervening years, though, a larger share of the origination business fell instead to banks – regional, national and international.
CMBS is itself not a type of origination in a traditional sense, so the classification here may be confusing. But Alexis Maltin, vice-president, real estate research, MSCI, explained in an email: “The point of origin for a CMBS issuance is most likely a national or international bank,” institutions that “function as conduit lender.”
Issuers of the underlying mortgages intend that they will be packaged in a security and transfer them to a trust or remote entity that then becomes the issuer of that security.
As Maltin indicates, it is worthwhile to distinguish one of these loans from one that the originating bank simply “holds on its own balance sheet.” Accordingly, in the years after this one and next, bank lending outside the CMBS space will constitute a larger share of maturing loans – that is, it will constitute more than half of the loans scheduled to mature in 2026 over $200 billion in 2028, and neither CMBS nor banks will dominate. So there is a clear limit to the duration of the wave.
Until it ebbs, though, borrowers looking to refinance must be aware that they “may well be met with higher capital costs, fewer willing lenders and more conservative lending terms” than they would have expected without this statistical cliff.
MSCI includes a note on its methodology. The data capture of loan origination does not always include a maturity date, so a date often has to be supplied to complete the database. MSCI’s estimations are integral to its take on the timing of the $900 billion wave.
MSCI looks at seven distinct property sectors: office, retail, industrial, hotel, apartment, senior housing and development sites. Deal volume in February 2023 declined year-over-year for every sector except retail. Retail transactions rose 36 percent YoY. The two biggest downward moves came from apartments (-76 percent) and offices (-66 percent).
With a decline in volume came a drop in price. The RCA CPPI National All-Property Index fell 6.9 percent in February from a year earlier.
Newly distressed assets rose in the second half of 2022, reaching $13.7 billion. Close to 65 percent of these were in the retail and office sectors, which “have faced fundamental challenges tied to property obsolescence.”