New Origination Opportunity: $42.4 Billion of Performing CRE Loans in Maturity Default

By

Aug 24, 2020

CRE
Opportunity

Summer 2020 has shown conflicting economic signals.  The S&P 500 is at an all time high as have both unemployment and bank loan loss reserves.  Commercial real estate has seen origination volume drop drastically and the bucket of loan maturities in need of financing is growing.

Decreases in new mortgage volume from banks and insurance companies is opening opportunities for non-bank, especially bridge lenders.  Extrapolating CMBS data, there is an estimated $42 billion of performing loans past their maturity date in need of refinancing.  

Origination Volumes
According to the Mortgage Bankers Association recent report, new origination for CRE mortgages fell 48% for Q2 2020 compared to Q2 2019 and fell 31% to Q1 2020. Comparing decreases by lender in Q2 2020 and Q2 2019, originations for insurance companies decreased 49%; commercial banks 55% and CMBS 95%. Changes in volume by property type is detailed below.

Origination Volume Q2 2020 compared to Q2 2019

Property Type Change
Hotel-91%
Retail-74%
Office-71%
Industrial-44%
Multifamily-24%


Source:  Mortgage Bankers Association

Matured Loans 
August data reported by Trepp cites a CMBS delinquency rate of 10.3%, or $51.4 billion for the almost $500 billion of CMBS debt outstanding.  That figure includes loans that have continued to pay their debt service and would be marked as performing, except that they have passed their maturity date and not paid off the loan.  These loans are referred to as performing maturity default or performing maturity balloon.  As of August 21, CMBS has approximately $5.67 billion of performing maturity balloon loans.  Hotel and retail make up 87% of these loans with the full property type breakdown is below. 

Share of CMBS Performing Maturity Default by Property Type

Source:  Data from Trepp

CMBS represents approximately 13% of the total $3.7 trillion market of commercial real estate debt.  Assuming the same ratio across the CRE mortgage universe, there is approximately $42.4 billion of performing loans in maturity default looking for refinance.  

Types of Default
Default generally falls into 3 categories – maturity default, term default or technical default.  Loans with maturity default have passed their loan due date without repayment.  Loans could be performing maturity default meaning they remained current (continue to pay debt service) but not paid the outstanding balloon amount at maturity.  This can be due to different reasons, including new loans taking longer to close or an asset sale falling through. It can also be due to their traditional lenders reducing their lending capacity or a perceived decline in the property’s value to support the amount of debt.  Loan to value is a good indicator of potential maturity defaults.  

When referring to term default, it is generally a non-payment of debt service or a financial default that happens prior to the maturity date.  Debt service coverage is a good indicator of potential term defaults.

Technical default is the borrower violating a non-financial term of the loan agreement. For example,  not maintaining a certain level of insurance or a zoning issue could be a technical default.  Technical default does generally happen during the term.

Conclusion
CRE lenders have always been savvy and kept an eye open for opportunity.  Many are now watching and waiting patiently for the wave of non-performing loans that will inevitably come as a result of the crisis.  In the meantime, lenders should take advantage of market need for origination on the estimated $42 billion of loans needing refinance.   

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