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Lenders and special servicers are looking beyond refinancing options when it comes to working with borrowers on commercial real estate loans that are set to mature in the coming months and years, even as those loans increasingly are backing properties facing distress.

According to an analysis by Moody’s Investors Service, the percentage of real estate properties that use commercial mortgage-backed securities debt that are being refinanced is on the decline. Conduit refinance rates were 78.1% and 71.8% in the first and second quarter of this year, respectively, compared to 85.5% in 2019, the year before the Covid-19 pandemic and broader economy upended the commercial real estate market.

“Given the low interest-rate environment that existed before the pandemic, it wasn’t surprising to see so many loans refinanced then, especially if a borrower had a strong debt-service coverage ratio, which measures available cash flow versus debt obligations,” said Matthew Halpern, vice president and senior credit officer at Moody’s Investors Service.

Interest-rate hikes imposed by the Federal Reserve over the past year in the wake of rising inflation have compressed real estate values. Add to that rising vacancy rates and a weaker leasing environment in especially the office sector, and the pressure has increased on building owners with loans coming due in the near term.

“Some loans are performing well from in-place cash flow but are unable to refinance,” Halpern said.

Lenders also have tightened standards in the wake of a more challenging economy and commercial real estate market, with some banks outright saying they’ve stopped new lending to office properties. While fewer loans are getting refinanced overall, there’s been an uptick in the number of performing loans that are past maturity but haven’t been formally extended. That amount, negligible before the pandemic, reached 5.2% in Q1 of this year and 6.9% in Q2.

“That means the borrower is still making interest and principal payments as if the loan hadn’t matured — which typically suggests the borrower is committed to the property,” Halpern said. “Because the overall refinance rate has declined in recent quarters, the number of performing loans past maturity has naturally risen.”

The Moody’s analysis, which only examined CMBS loans, found 16.7% of maturing loans tracked by the firm were delinquent as of the second quarter. That share was much higher in the office sector, with 27.6% of office loans scheduled to mature in Q2 2023 considered delinquent.

 

Source: SFBJ

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The rising cost of capital has stalled most commercial real estate development in 2023.

Unless projects were already underway or financing had been secured, there will be few projects started, according to John Chang, senior vice president of research services, Marcus & Millichap.

In the firm’s 2023 Construction Trends Report video, Chang said that otherwise, “builders are being pushed to the sideline.”

“The cost of capital is rising due to the Federal Reserve’s decisions to raise rates considerably, making it difficult to get a construction loan, and if you do, it’s rather expensive,” Chang said.

Loans are running 350 to 400 basis points over the Secured Overnight Financing Rate (SOFR) of 4.5%. Alternative debt financing is running between 8.75% and 10.5%.

Forecasting Growth for Key Asset Classes

Forecasting for what’s coming online in 2023, Chang said apartments are forecasted to complete 400,000 new units in 2023, growing the overall inventory by about 2.1%. Some 43% of that will be in just 10 metros.

Industrial will see 400 million square feet in 2023 for an inventory gain of 2.3%. Half of that construction will be in eight metros.

Marcus & Millichap expects 42 million square feet of retail to be completed, a “meager” half-percent of growth, Chang said, and two-thirds of that will be single tenant. Office will see 86 million square feet or growth of 1 percent and two-thirds of that will be situated in the suburbs.

Self storage should see 2.5% inventory growth – or 47 million square feet, which is well below the 73 million square feet completed in 2019. Self storage is a rare asset class where completions possibly will also grow in 2024.

“Demand drivers should begin to strengthen by early 2024 for most property types,” Chang said. “There has been relative relief in materials costs for lumber (currently 38% above pre-pandemic rates) and cement (28% above). Supply chain issues are now mostly under control.”

 

Source: GlobeSt.