The year 2012 was supposed to have been a total diaster for commercial real estate loans. Almost $151 billion worth of multifamily and commercial real estate loans were scheduled to mature during 2012, just five years after the insane underwriting year of 2007.
During the heady and insane underwriting months of 2007, some conduits and money center banks were making five-year commercial loans of up to 75% to 80% loan-to-value ... based on projected rents! A number of these commercial loans were given a one year or two year interest-only period, before the loan started to amortize. A few crazy conduits even wrote deals up to 82% loan-to-value, and I know that a handful of conduit commercial loans were written up to 82% LTV, with an interest-only period of two-years, all based on projected rents! Its no wonder that many experts expected a shipwreck in 2012, when these five-year, conduit-style commercial loans matured.
But a funny thing happened in 2012. Commercial real estate loan (CMBS) delinquencies actually declined from a high of around 9% at the beginning of the year to just 8.7% in the fourth quarter of 2012. Every quarter of 2012 the delinquency rate declined. It's no wonder that confidence has returned to the commercial real estate mortgage bond market.
So what happened? New commercial real estate construction during the Great Recession came to a complete halt. With no new buildings coming on line, there was less competion for tenants. The commercial properties securing most conduit loans were also larger, better-located, better-managed, and more desirable than the typical small commercial property. Occupancy rates for conduit-quality commercial properties held up surprisingly well.
As Treasury bond yields plummeted, real estate investors became desperate for yield. Cap rates compressed, and many commercial properties, those that were well-leased, actually saw some appreciation. Finally, property owners were forced to become more efficient. Costs declined and net operating incomes actually improved.
In the end, most commercial real estate owners were able to either refinance their ballooning loans in 2012 or sell them for more than what they owed on the property.
How does the future look for commercial real estate loans? It looks excellent. Almost $151 billion in commercial real estate loans matured in 2012. According to the Mortgage Bankers Association, less than $120 billion in commercial real estate loans are scheduled to mature in 2013. Even fewer commercial loans will mature in 2014. The years 2015, 2016, and 2017 will be a bit more challenging, as the ten-year loans written in 2005, 2006, and 2007 finally mature. With no new commercial construction going on, however, the challenge should be quite manageable.
Bottom line: The crisis in commercial real estate financing is arguably over. There will probably be no new flood of commercial real estate foreclosures.
