Many said the economy is finally on the rise, after the quake of 2008. Perhaps that’s true in some sectors, but with respect to Commercial Real Estate (CRE), the shock-waves are getting much worse than initially imagined.

To put everything into perspective, in 2009 (a year many said was a horrible year for CRE), only 16% of commercial mortgages that matured were under water.

• In 2010, by contrast, it is conservatively projected that more than 36% of the $270 billion in commercial real estate loans maturing are under water this year, meaning the mortgage balance is greater than the value of underlying property, according to data from Oakland, Calif.-based research firm Foresight Analytics. And the worst is yet to come.
• In 2011 —  are you bracing yourself, nearly 49% of maturing loans will be under water, followed by 63% in 2012, 61% in 2013, and 57% in 2014. In all, from 2010 through 2014, the total amount of maturing loans expected to be under water is a whopping $770 billion.

This year’s maturity issues may prove worse than the figures outlined above suggest, because the projection of upside-down loans maturing, at 36%, doesn’t include loans that would have matured in 2009 and were simply extended for one year. That is the extend and pretend strategy many lenders have pursued.

This phenomena could add substantially to the volume of underwater maturities this year, based on Anderson’s estimate that 60% of mortgages with 2009 maturities were granted one-year extensions. “That’s obviously is just going to add to that [36%] figure.”

Kicking the can down the road

Banks hold the greatest number of the maturing loans through 2014, a total of $785 billion. Of that amount, 68%, or $535 billion, are projected to be under water over the same period. With little liquidity in the marketplace (yet no real pressure from the federal government to write down the problem debt), how will banks deal with their underwater loans? Accordingly there are two likely scenarios.

• The rosiest picture entails banks extending the loans, adding to the next year’s already growing volume of underwater maturing loans.
• The Armageddon scenario could go something like this: An unforeseen panic or event pressures banks and other lenders to unload problematic loans, taking hefty losses on maturing mortgages that are under water or otherwise unable to qualify for refinancing.

CMBS sector tires of distress

The longest commercial mortgage-backed securities (CMBS) loan extension to date has carried a two-year term. As of Dec. 8, 2009 the volume of all CMBS loans sent to special servicing for resolution had climbed to 9%, an all-time high, according to commercial real estate data and analytics firm Trepp LLC, which is based in New York.

Special servicers face a growing number of loans backed by properties with multiple problems, which may include a value that is under water, or insufficient cash flow to cover debt service or the special servicer’s mounting fees.

Life companies eke by

The $93 billion of commercial real estate loans held by the life companies slated to mature through 2014 is predominantly backed by institutional, Class-A properties that have few issues with cash flow.

There’s one caveat. Unless life company loans were written to 60% loan-to-value ratios, the roughly 40% decline in commercial real estate valuations across the board may have those LTV’s approaching the 100% mark.

The upshot of the problem? Although seemingly a counterintuitive solution to the problem, “as much as the regulators would like to press the banks even harder and force everyone to clean up their balance sheets and move on, they recognize that if they did that they would create much bigger losses in the near term and exacerbate the whole capital problem — or lack of capital — for banks.”

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Posted in Debt, CMBS, Bankers, Commercial Real Estate | One Comment