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About .3 billion of the 2017 maturities, or 7.3%, that were underwritten at the height of the market under the most lax underwriting standards are specially serviced and are unlikely to successfully pay off without a loss.
Looking at 2017 maturities by collateral type, office collateral represents the bulk of 2017-maturing CMBS at just over one third, or .03 billion by UPB, while retail, with 29.7% of the 2017 maturities, has the highest exposure to LTVs greater than 80.0%, at 52.0%.
Weaker LTVs among retail and office property loans are a major concern, as the two property types face the greatest exposure with about 30% apiece, by unpaid principal balance, of the 2016 maturities.
However, given the market’s appetite for loans with higher leverage, the projected payoff rate would rise to 75% with an increase in the LTV threshold to 85%.
By year of issuance, 2006 has the greatest portion of maturing loans, with 76.9%, and 44.0% of the loans originated in 2006 have LTVs greater than 80.0%.
The benign interest-rate environment contributed to the high rate of loans paying off at maturity in 2015.
In the wake of the decision by Federal Reserve policymakers in December 2015 to raise the benchmark federal-funds rate for the first time in nearly a decade, we factored into our estimates for 20 how an environment of rising interest rates will affect borrowers’ ability to refinance.
The $101.5 million Southern Hills Mall, the second-largest loan in Banc of America Commercial Mortgage Trust 2006-3, and the $140 million Plaza America Towers I and II loan (in Greenwich Capital Commercial Funding Corp.
Commercial Mortgage Trust 2007-GG9) are examples of maturing retail and office loans whose refinance prospects may be limited by LTVs of more than 100.0% and debt yields less than 8.0%.
This assumes a conservative 5.0% interest rate and a 1.35x debt service coverage ratio.
If we lower the interest rate to 4.5%, which is average in today’s market, we estimate that 67.7% of loans maturing in 2016 could be refinanced.
Looking at the 2017 maturities by debt yield, about 52.9% by balance will successfully pay off based on a debt yield of 9.0%, and using a less conservative 8% debt yield, the on-time payoff rate increases to 65.5%, by balance.
Based on calculated refinance proceeds, our payoff projections are similar, as Morningstar estimates that only 56.6% of 2017 maturities generate enough cash flow needed to successfully refinance the existing debt without additional borrower equity.
After including the loans that already paid off through February and defeased loans, we expect the payoff rate to be about 65%-70%, as 43.0% of the loans maturing this year, with a total unpaid principal balance of .52 billion, have loan-to-value ratios greater than 80.0% and may have difficulty refinancing.