Commercial Real Estate Refinancing Crisis
Nothing shocking here. Just a very well written and quantified report on the pending refinance crisis coming in commercial real estate.
Some telling excerpts from the Deutsche Bank report (emphasis mine):
While most attention in commercial real estate today is focused on the dramatic deterioration in term loan performance (i.e. the performance of loans prior to maturity), we believe that a potentially even more troublesome issue is the extent to which loans originated during the 2005-2007 period will encounter problems refinancing at maturity. To date, this issue has largely been dismissed with the vague and, in our view, naive observation that lenders will simply extend the maturity dates of loans that fail to qualify for refinancing. However, the scale of this problem is virtually unprecedented in commercial real estate, and its impact is likely to dominate the industry for the better part a decade.
At its core, the issue is fairly straightforward: The dramatic weakening in underwriting quality that began in 2005, along with compressing cap rates and ballooning leverage, led to rapidly rising commercial real estate prices. In 2007 the commercial real estate bubble burst, along with most other credit bubbles. Since that time underwriting standards have tightened back to their original levels, and perhaps further, as allowable leverage has plummeted and cap rates have skyrocketed. Purely as a result of the enormous changes in the available financing terms (e.g. lower leverage, higher cap rates and credit spreads), we estimate that commercial real estate prices have declined 25-30% from their 2007 peak. On top of this, the impact of the worst economic recession in decades on property cash flows will likely push them down additional 15-20% over and above the declines due to financing market changes. We argue in this report that, as a result, there are hundreds of billions of dollars, perhaps more than a trillion dollars, of commercial mortgages scheduled to mature over the next decade that are unlikely to qualify for refinancing without substantial equity infusions from the borrowers.
Their findings are as follows:
1. At least two thirds of the loans maturing between 2009 and 2018 ($410 billion) are unlikely to qualify for refinancing at maturity without significant equity infusions from borrowers. For the 2007 vintage, well in excess of 80% of the loans are unlikely to qualify.
2. The aggregate equity deficiency (i.e. the additional amount of equity that borrowers would have to put up in order to qualify to refinance) is at least on the order of $100 billion.
3. Our (conservative) estimate of maturity default-related losses for fixed rate CMBS is $50 billion, 6.5% of the aggregate outstanding balance.
4. We estimate that maturity default-related losses will be at least 4.6% for the 2005 vintage, 5.8% for the 2006 vintage and 12.5% for the 2007 vintage.
Sell, sell, sell.
Update: The report was updated yesterday but I cannot find it anywhere. Zero Hedge has a screen shot of the intro page of the updated report. Deutsche Bank has increased their projections on the amount of loan defaults we will be facing. We are heading for a very rocky road in the commercial real estate industry.
The Future Refinancing Crisis in CRE
