Shopping Center Business

MAY 2016

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CMBS 246 • SHOPPING CENTER BUSINESS • May 2016 hesitant to price loans given the warehouse risk in a volatile spread environment. Due to increasingly stringent capital rules and heavy regulatory costs, banks are cutting staff on trading desks and reducing their exposure to CMBS, leading to evaporating secondary market liquidity. Add a second potential Federal Re- serve rate hike in 2016 to those macro and regulatory headwinds, and the out- look becomes slightly dubious for the more-than-$200 billion in non-defeased, non-delinquent loans coming due be- tween now and the end of 2017. In order to get an idea of how the ma- turing loans may perform, we compared them to the most recent six months' worth of new conduit originations based on cap rate, loan-to-value ratio (LTV), debt service coverage ratio (DSCR) and debt yield. First, new DSCRs were calculated based on a simplified "new" interest only loan based on property type/MSA-level average loan rates on recently originated loans. Second, the maturing loans' appraised values were updated based on property type/MSA-lev- el cap rates of recent originations. Third, current debt yields were calculated based on most recently available NOI data and current loan balances. Finally, new DSCRs and LTVs were calculated for maturing loans based on several rate hike assump- tions. For DSCR, the rate hike affects the loan rate directly, increasing debt service and decreasing DSCR. For LTV, the rate hike is assumed to inflate cap rates and, consequently, decrease appraised value and increase LTV. For debt yield, instead of changing the maturing loan debt yield, the threshold for qualifying for refinanc- ing was raised by the assumed interest rate increase. Those measures were then compared to the average property type/MSA levels of recent originations. The DSCR threshold was the easiest hurdle to jump. Based on current NOI levels of maturing loans, 85 percent of those loans (by balance) meet or exceed their respective DSCR thresholds. Current rates are around 100 to 200 basis points lower than they were back in 2006 and 2007; maturing loans do have some breathing room on the DSCR front given the lower debt service burden of these new low rates. Given a 25-basis-point increase, 82 percent still meet the DSCR require- ment and 68 percent pass the test given a 100-basis-point increase in rates. The story is a little bleaker when looking at the LTVs and debt yields of these maturing loans. Using current NOI levels and new loan cap rates (cap rate = NOI/appraised value so new assumed appraised value = current NOI/cap rate), the new loan LTV thresh- old was much more restrictive, eliminating about 43 percent of maturing loans from the "refinanceable" bucket. Further, only 52 percent of maturing loans meet their respective debt yield thresholds assuming no change in rates. If debt yields jump 100 basis points, 59 percent of loans will fall below the minimum required debt yield. All of these calculations come after re- moving maturing loans with negative NOIs and adjusting the refinancing thresholds to take MSA level values into account. Further, the MSA level values were only used when they were less restrictive (lower DSCR, LTV, and debt yield) to lower the bar for maturing loans. On a DSCR basis, almost $31 billion in maturing loans will not be able to re- finance their entire balance. On an LTV basis, almost $93 billion would need ad- ditional equity in order to refinance at current income and cap rate levels. The number goes up to $100 billion if we apply the debt yield parameter. This is not to say that all these loans outside of the recent CMBS origination parameters will default. There are many on the margin that will either need non- CMBS lenders to provide higher leverage or sponsors willing to invest more equity. Bridge, mezzanine, and non-bank lenders are in a position to issue some serious volume in the next two years working on loans in that marginal area between totally refinanceable and those in need of some wiggle room. Commercial real estate prices have just plateaued and if they do begin to decline, the CMBS market will see maturity defaults rise and more loans go from CMBS to the bridge, mezz, and non-bank lending space. SCB Sean Barrie is a research analyst with Trepp LLC, which provides information, analytics and technology to the CMBS, commercial real estate and banking markets. Coral Town Park | Naranja, FL Pembroke Pines City Center | Pembroke Pines, FL Granada Shoppes | Naples, FL Naples Fifth Avenue | Naples, FL Vicenza Plaza | Hialeah Gardens, FL V i s i t u s a t I C S C R e c o n , B o o t h S 3 2 8 S S t r e e t Call 305.261.4330 or email leasing@courtelis.com to lease your Florida location today! www.courtelis.com Developing Great Places. Helping you grow.

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