Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/566807
38 • September 2015 • Western Real Estate Business www.REBusinessOnline.com T he current market — with the lowest interest rates in decades and an abundance of capital — is a relief to investors who are still re- covering from the aftershocks of the recession. Although it appears that we have reached frmer ground, there are a few facts and trends in CMBS that could rattle this sector. The much-anticipated rise in inter- est rates will coincide with a large number of CMBS loans that mature between 2015 and 2017. During this time, some $300 billion in loans will mature. About $70 billion to $80 bil- lion are scheduled to mature in 2015 alone. CMBS reporting agencies sug- gest 7 percent to 10 percent of these loans will fail to payof for various reasons. This number, however, does not adequately incorporate the impact of assets that have been "watchlisted," including loans that are stressed and performing only because the owners subsidize the debt service shortfalls. There are also some real estate seg- ments and geographic markets where there has been little recovery or stabi- lization. Cities like Las Vegas and Sac- ramento may never fully recover, while fewer investors are jumping into sec- ondary and tertiary markets. For small balance borrowers, there is still a void in small loan f- nancing. These investors still struggle to fnd new equity to recapitalize in- vestments or secure well-capitalized sources eager to buy small balance loans out from under them. Global markets will likely remain volatile, with many making bold moves to strengthen their own economic and political agendas. Some governments are bankrupt or not completely out of the woods. This leaves many ask- ing how the actions of others will impact the U.S. economy in the com- ing months and years. Recent events in Greece and China have resulted in loan re-pricing for some lenders. Navigating the CMBS special-ser- vicing process has also become more complex as dwindling distressed portfolios ofer servicers fewer fee- income opportunities. CMBS pools may experience the inability to fund advances to the bondholders as they come closer to the end of the pool life. This will most likely increase the number of note sales, making it para- mount that buyers obtain fresh equity and capital that can line up to coincide with payofs. CMBS originations will likely top $100 billion in 2015, though under- writing standards will continue to weaken with more than 40 origina- tion platforms competing for the same product. Loan-to-value ratios of 85 percent to 90 percent aren't common yet, but we are starting to see them creep up from 75 percent. Values to- day are also highly subjective, and often based on huge disparities in leasing assumptions and cap rates. Although economists are predicting another solid two to three years of performance in the commercial real estate market, borrowers should seek out their options to avoid being shak- en up by future changes. Despite the challenges that these trends present, borrowers do have alternatives that can keep them from falling into the cracks. If you are fac- ing an upcoming CMBS maturity and don't believe you will have the capi- tal lined up by that maturity, be care- ful. Taking pre-emptive action to dual track your maturity with an advisor who understands special servicing. CMBS MATURITIES Watch out for tremors in the market as recovery continues. By Tanya Little Little continued on page 48