Q&A: The Untold Story of the Wall of CMBS Maturities

By Dennis Kaiser

There’s roughly $100 billion of CMBS assets set to mature in the coming year, and S&P predicted a 13% default rate on these loans. What’s alarming about this situation is that, in many cases, the impending defaults will not be a consequence of properties not performing well. For many property owners, the assumptions used in underwriting for their refinancing strategy are no longer working, as the lending climate has significantly changed and several major lenders have exited the marketplace, while underwriting standards have tightened. Investors looking to refinance a property face several options including a) doubling-down by investing new capital; b) defaulting on the loan at maturity; or c) selling the property.

Connect Media asked Ten-X Commercial’s Steven Jacobs to share insights about how this is expected to play out for institutional players, who likely won’t be challenged to commit additional equity to retain control. But for thousands of small-and mid-sized owners, that may not be an option. These owners could be forced to dispose of an asset in a short timeframe, and face significant execution risk should a buyer “re-trade” them.

Q: Can you explain to us how the wall of CMBS maturities is exacerbated by re-trades?

A: A re-trade refers to when, after initially agreeing to the terms of a deal, a buyer or seller decides to renegotiate. At a minimum, this can be a major hindrance that prolongs negotiations for the other party, but it frequently derails the deal entirely. With about $20 billion of remaining CMBS 1.0 loans maturing before mid-2018, many owners will be selling their properties to pay off maturing loans. In these cases, a re-trade can spell default, because the seller will be unable to pay off the debt before it comes due.

Q: Is it common for owners with maturing loans to be banking on a property sale to pay off their maturing loan?

A: When these CMBS loans were originated a decade ago, many property owners were expecting to refinance their loans at maturity. Since then, however, several sources of capital have dried up, and available leverage levels have reduced significantly. Many owners are being forced to sell their properties to pay off the maturing loan — especially smaller investors, who don’t generally have access to additional capital.

Q: How can Ten-X serve as a solution to this problem?

A: A traditional transaction doesn’t have a defined due date, but we’ve standardized the process on Ten-X. Our Live Bid transaction solution, for example, includes a pre-defined auction date, so the seller is assured that the transaction will close before the loan maturity. Another factor that enables the re-trade is the exclusive due diligence buyers receive in most transactions. On Ten-X, all due diligence materials are compiled before we begin marketing the property to a global pool of pre-qualified buyers. Buyers review these materials before submitting offers, so they have all necessary information before escrow. Once buyers and sellers agree to a transaction on Ten-X, the sale occurs an astounding 97% of the time!

For comments, questions or concerns, please contact Dennis Kaiser