Nearly 20% of the $330bn (€250bn) in CMBS loans due to mature through the end of 2017 could face refinancing challenges if benchmark interest rates rise by 150 basis points, according to analytics firm Trepp.
Such a scenario is looking more feasible after Janet Yellen, head of the Federal Reserve, suggested on Friday that rates might move higher sooner than expected – if data confirm a quickening pace of hiring in the US labor market.
“All eyes are on interest rates,” said Susan Persin, senior director of research at Trepp in a recent analysis.
“The growing volume of maturing CMBS loans that will need to be refinanced raises the question of their sensitivity to rising interest rates and where opportunities might arise if and when borrowers have difficulty refinancing.”
A total of 28,000 loans will mature between now and 2017, according to Trepp, many of which were originated between 2004 and 2007 with 10-year terms and interest-only amortisation.
The situation is akin to a wave gathering momentum. About $26bn will mature during the rest of 2014, increasing to $79bn in 2015. The volume of maturing CMBS loans surges to $111bn annually in both 2016 and 2017.
According to Trepp’s mid-year sensitivity analysis, 5% to 8.5% of CMBS due to mature in 2017 would be unable to meet a 1.2x debt-service coverage ratio (DSCR), which is likely to be a minimum requirement for refinancing.
“Rising interest rates will certainly impact borrowers’ ability to achieve a desired DSCR of at least 1.2x for refinancing,” said Trepp. “If rates climb by 150 basis points, 15.7% of [total] outstanding loan balances could be affected.”
Office loans could be among the most problematic. The sector accounts for 35% of the loans coming due in 2017, or $116bn.
While interest rates on recently securitised office property loans are relatively low, at about 5.01%, Trepp says 8.5% of the loans coming due would have a DSCR of less than 1.2x if they were to be refinanced at prevailing rates.
That figure will rise steeply as rates increase, says Trepp, with the proportion of loans that could face difficulty refinancing reaching 18.9% if rates were to climb by 150 basis points.
An offsetting factor is that, as market conditions improve, rents will increase, which would result in property value improvements that would reduce loan-to-value ratios.
“Still, the volume of maturing CMBS loans will grow during the next several years,” said Persin. “Higher interest rates will make it more difficult for borrowers to meet requirements for refinancing loans, creating opportunities for property investors.”