Commercial mortgage backed securities add uncertainty in 2018

The wave of commercial mortgage backed securities in need of refinancing will linger in 2018. These mortgage bonds issued prior to the great recession will continue to mature at a steady pace over the coming year.

Approximately 41.7 billion in CMBS securities needed to be refinanced last year. 2017 was marked by dire predictions about these loans, but it appears such predictions were seemingly unfounded as a vast majority of these loans were successfully refinanced. The CMBS market remains stable and the predicted wave of defaults did not occur.

Even though the dire predictions of last year did not materialize, a large amount of pre-recession debt will need to be refinanced in the coming year. Uncertainty lingers over the CMBS market. Analysts expect approximately a hundred billion securitized commercial mortgages will need to be refinanced in 2018. The pace of CMBS maturities is expected slow, but the same difficulties remain for the holders of this debt when it comes to refinancing. Market conditions might make refinancing even more difficult than it was last year. “Against the backdrop of slowly rising interest rates and a narrowing yield curve, however, refinancing may prove more expensive than it has in the past, suggesting a potential headwind for commercial REITs,” said resource portfolio manager for Real Estate Diversified Income Fund, John Snowden.

Rising interest rates and tighter lending standards could make refinancing more difficult for the holders of these commercial mortgage-backed securities.

Refinancing this CMBS debt will likely be a more expensive proposition in 2018, as a result of rising interest rates. Higher interest rates make loans more expensive and have lingering effects on commercial property values. Higher interest rates reduce the amount of income commercial property can achieve lower the value of that property as a result. In addition some property owners might not be able to refinance to the total value of their mortgage as a result of higher lending standards. Prior to the recession an owner may have qualified for $3.6 million mortgage on a $4 million property. Under current lending standards that same owner will likely only qualify for a $3.2 million mortgage. That owner will therefore have to take on $400,000 out-of-pocket in order to fully refinance their loan.

The holders of some of these commercial mortgage-backed securities might be tempted to sell their mortgaged property, but this presents its own difficulties.

Some property owners can avoid the difficulty of refinancing to a higher interest rate with less favorable terms by simply selling their mortgaged property. These property owners face new uncertainties should they choose to sell their leveraged commercial property. The overheated real estate market prior to the recession was marked by inflated property values. some property owners might not be able to achieve a sale price that pays for their mortgage, as commercial property values has since come back down to earth. In addition the sale of any piece of real estate takes time, some owners may not be able to sell their mortgaged assets before their loan matures and a wave of defaults could follow.

The future remains uncertain for the holders of the $100 billion in mortgage debt that needs to be refinanced in the coming year.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.