CMBS Losses: Are We There Yet?

October 13, 2016

CMBS Losses:  Are We There Yet? Photo

This week’s chart depicts the realized cumulative loss rate experienced thus far for Commercial Mortgage-Backed Securities (CMBS) conduit transactions originating between 2004 and 2008. $566 billion in non-agency conduit bonds were issued during this timeframe (a record for any 5-year period), and as of September 30 2016, $143.9 billion remained outstanding1. The average cumulative losses range from 3.4% to 11%, with a wide dispersion among the vintages. The 2004 vintage has experienced an average loss rate of 3.4% versus 11% for 2008.

Cumulative losses are expected to rise in the coming months as legacy CMBS loans reach their maturity dates. There has been much discussion regarding the CMBS wall of maturities that the market is currently experiencing. Roughly $128 billion of CMBS loans are scheduled to mature in 20171. To date, the refinance success rate has averaged around 80%, which has been supported by strong real estate fundamentals as evidenced by rising rents, low vacancies and increasing property values. While loans that originated pre-crisis were aggressively underwritten, the availability of debt and low interest rates have aided refinance success.

Several factors -- including the loan’s debt service coverage ratio (DSCR), loan-to-value ratio (LTV) and debt yield -- are key indicators which will gauge the refinanceability of these loans. According to the Commercial Property Price Index (CPPI), commercial real estate property values have recovered 149% of peak-to-trough losses, which has develeraged CMBS loans. However, underperforming loans may have difficulty refinancing as lending standards continue to tighten.

Key Takeaway:

While the refinance success rate has been strong thus far, I would expect to see more loans struggling to meet refinancing hurdles in the next 18 months, with corresponding higher loss rates. However, the availability of capital from alternative sources away from the CMBS market should alleviate the high losses the market once feared. I still see pockets of opportunities in various CMBS transactions which have adequate credit enhancement given forecasted loss projections.

1. Source: Trepp

Tags: Chart of the Week | Mortgage-Backed Securities | Maturity wall | Commercial real estate

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