Few Maturing CMBS Office Loans Have Paid Off

The world of CMBS isn’t the entirety of CRE office loans, but given the lack of broader public data, it’s an important indication of what might be happening in that market. The news from Moody’s Analytics CRE isn’t pleasant.

“The month of September saw ~$755mm CMBS office loans reach their fully extended maturity, the lowest number since April,” they wrote. “The payoff rate of these maturities, while better than July and August, still came in at a paltry 11.1%. The YTD pay off rate fell slightly to 31.2%. Of the loans that have failed to pay off at maturity in 2023, half have managed to secure extensions from special servicers.”

A large part of September’s shortfall, as Moody’s had previously speculated would happen, was the failure of the DUMBO Portfolio and 15 MetroTech Center to pay off at maturity.

This was the smallest payoff portion in the first nine months of a year since 2008 “and well below the nadir reached in 2009, when 47% of these loans got paid off,” the Wall Street Journal reported. Which in other words means things may be looking bleaker for office properties than during both the Global Financial Crisis and the height, or depth, of the Covid-19 pandemic.

Normally office owners, like many in CRE, refinance properties when loan maturities come due. The move pushes off the big cash reckoning while allowing the building to continue operating, generating NOI. As GlobeSt.com has often reported over the last 18 months, refinancing has become increasingly difficult. Property plans built on low interest rates and high leverage available not long ago can fall apart given the much higher rates available now as the Federal Reserve has been battling inflation. Typically, lenders now want far more equity participation. The borrowers often can’t or don’t want to put more into the project.

CMBS loans tend to have higher rates than many other sources, but alternatives are getting thinner. After the bank shakeups from earlier this year, many institutions have pulled back from CRE lending, whether absolutely or by increasing underwriting demands to a degree that leaves many would-be borrowers unqualified. The pressures on banks have only increased as the Fed has emphasized their concerns about CRE borrowing. And now regulators are looking more closely at nonbanks, which could put pressure on their lending activities as well.

Finally, it’s important to remember that CMBS loans are a specific sector and not necessarily representative of the majority of CRE loans, most of which aren’t transparent. Many institutions are reworking loans to prevent them from defaulting and hitting balance sheets. So, while it seems reasonable to make broader observations and decisions based on CMBS results, the resulting projections could be deceptive.