CREFC Panelist: Lenders Not Extending CRE Loans Easily

If there is to be a doomsday for CMBS loans that go into delinquency, it is likely to occur in the next two years, in the view of some experts. 

“Right now, the uncertainty in pricing that has stalled deals also is preventing a wave of action on the default front. At some point, trades will start and set pricing standards. When pricing is set, the dam will break,” a recent bulletin from Yardi Matrix predicts.

There are already signs of potential trouble. An analysis by Moody’s Investors Service cited by Yardi found that over 75% of CMBS conduit loans were paid off at maturity in 2023. However, there were signs of increasing defaults. According to Moody’s, some 7.3% of loans that matured in the first quarter, and 18.7% of loans that matured in April or May, were delinquent.

In this hazardous environment, many large, well-capitalized owners of CRE are playing an “unprecedented dangerous game” when they default strategically on properties they want to get rid of. 

This is the view of some lenders participating in CRE Finance Council’s annual conference in New York this month, Yardi reports. Lenders noted that large firms typically get better loan terms because they historically default less.

In a report on the conference, Yardi Matrix quoted one panelist as saying, “I’ve never seen so many borrowers handing over the keys.”

Nor is this an isolated opinion. “Six months ago, we pointed to watching how lenders behaved in conjunction with borrowers. Could they work together for an extension? Now it’s reasonable to question if borrowers will be motivated to work with lenders on a solution. We’re expecting to see more buildings surrendered,” CommercialEdge Senior Manager Peter Kolaczynski has commented in an unrelated statement. 

Those borrowers who do seek an extension on maturing loans may find it tough going. Those who expect an easy ride are likely to find they must provide additional equity or reserves, pay higher interest rates, or make other concessions to get an extension approved, according to the Yardi report.

Loans originated seven to 10 years ago with conservative underwriting and the benefit of rent growth may find the path smoother. But some panelists predicted obstacles ahead for floating-rate loans originated in 2020-2022 on multifamily and industrial purchases at historically low acquisition yields in hot markets like Phoenix and Salt Lake City. “You need tremendous growth to make the numbers work,” a panelist is quoted as saying. These loans will come due in 2024 and 2025.

“The next 12-24 months will be critical in determining how the situation will play out and the severity of delinquencies,” Yardi concludes.