Office Loan Size Seems to Be Key to Chance of CMBS Payoff

Again, into the fray with office CMBS loans. For good reason, as the industry keeps looking to see what will happen with office property utilization, values, any potential impacts on investors or even other property types. Knowing the status of loans can help identify trends and potential issues.

A number of sources including Moody’s Analytics have looked extensively at CMBS office loans. Earlier in June came word of the developing long office loan modifications on class A properties like the Seagram Building at 375 Park Avenue in New York City or how even mixed use is showing up in special servicing now. To many, the latter was supposed to be the solution to office.

May was a big maturity month, and Moody’s added into the analytic mix floating rate CMBS office loans with a final maturity in 2023, which came down to four of these loans. There were more than $2.1 billion in maturities, not counting defeased loans. That was almost double everything from January through April. Cumulative payoffs have improved from 30% through April to 40.8%, or $1,344.5 billion paid off during the open period. Another 26.7%, or $881 million, was modified or extended. And then there was 32.4%, or $1,068.5 million, that fell into maturity default.

A few commonalities came through to Moody’s looking at properties with 25% vacancy rates or rolling within three years to have significant lease risk:

• Loans below 8% debt yield and significant lease risk didn’t pay off.
• All loans with more than 8% debt yield and limited lease risk paid off.
• Debt yields seem more predictive of payoff than lease rollover.

Another observation is the role loan size plays as indicator of whether there will likely be a payoff. Looking at year-to-date maturities, 86% of loans below $10 million paid off. In comparison, only 38% of loans over $100 million did.

The reason, according to Moody’s, starts with how financing happens. Banks and insurance companies will typically lend up to $30 million, with some topping out at $50 million to $75 million. Loans of $100 million or more either go the CMBS route, a few of the largest banks, or bank consortiums.

Those sources of lending are currently unavailable for CRE loans, particularly office. Either the lending institutions aren’t particularly interested or, in the case of bank consortiums, too many are feeling stress because of falling deposits. The banks want borrowers to keep money on deposit there and borrowers don’t want to maintain balances at multiple banks. And so, refinancing becomes far more difficult.

After the May round, there is $6.3 billion of maturities through the end of 2023. The future doesn’t look rosy as 83.7% exhibit either sub-8% debt yield, significant lease roll (current vacancy plus 36-month lease roll greater than 25%), special servicing, or real estate owned (REO) status.

“Almost half of the loans with significant lease rollover are already experiencing debt yields that would make refinancing a challenge,” Moody’s writes. “If these loans behave similarly to the loans that reached maturity in January through April, that would result in ~$4.9 Billion, or ~63% of these loans failing to pay off at maturity.”