Boxwood's research has been cited in recent industry publications below. The articles are posted with the permission of the publishers.
According to the above article excerpted here, commercial mortgage debt will begin spiking later this year, and the $300 billion plus of loans that need to be refinanced over the three years represents more than 2.5 times the amount that matured between 2012 and 2014.
CMBS issuance was shy of $100 billion in 2014 and is projected to rise modestly above that amount in 2015. Trepp estimates that nearly 20% of the commercial loans maturing over the next three years will require additional capital when the mortgage is either refinanced or the property sold.
Participants are much more optimistic about the ability of borrowers to refinance than they were just a year ago. Both JP Morgan and Wells Fargo have independently indicated that 80% of the commercial mortgages maturing this year will successfully refinance or be re-securitized.
The rising optimism about the fate of these mortgages stems in part from the recovery in property values. Prices of larger properties have increased significantly since the financial crisis, facilitating refinancings with reasonable loan-to-values (LTVs). Yet prices for smaller properties have not appreciated at an equivalent rate as larger, investment-grade assets, resulting in higher LTVs and greater refinancing risk.
Moody's/RCA CPPI Core Commercial Component Index has increased 12.8% over 12 months (as of September data) and, with double-digit annual returns over several years is only 5.8% below its previous peak level in the fall of 2007.
In contrast, real estate research and consulting firm Boxwood Means' composite Small Commercial Price Index (SCPI), which covers 117 metros, has gained 5.9% since September 2013 and is 13.0% below its previous cyclical peak.
"The pricing trend disparity explains why a greater proportion of small balance borrowers might still be 'underwater' or facing some refinancing challenges compared with borrowers with investment-grade property loans," said Randy Fuchs, principal/co-founder of Boxwood Means.
More than 40 CMBS loan origination programs were initiated in the past year according to Moody's. The competition has instilled looser underwriting standards and allowing for loan originations on terms that are more readily within reach of borrowers who originally obtained debt capital before the financial crisis.
Among these new CMBS lenders are firms focusing on small loans under $5 million such as Liberty SBF and R3 Funding. Ray Potter, a founder and managing partner of R3 Funding, claims that lenders are targeting the small balance space because they can generate additional loan production and revenue. "Outside of the gateway cities there has not been as robust lending from the banks and that is where CMBS originators are looking to increase their volume and profit; because you can get a higher profit margin on a $5 million [loan] than you can [get] from a larger loan."
Refinancing may be more challenging for 10-year loans maturing in 2016 and 2017 since borrowers closed these loans with high debt loads at the height of the CRE market. JP Morgan expects that between 65%-70% of these later-maturing mortgages will effectively be refinanced.
For the full article, please visit the Asset Securitization Report: "The Great Flood: How CMBS Will Handle $300B Coming Due in 2015-2017." (Subscription may apply.)
Freddie has doubled the number of originators to six on its three-month-old Small Balance Loan program, aimed at boosting affordable rental housing in the US and providing more liquidity to smaller rental property owners.
While it's unclear how many loans the agency has bought so far, a spokesman said Freddie may be in a position to launch an inaugural bond deal from the series, of about US$100m in size, in the second quarter.
Arbor Commercial Mortgage, Greystone Servicing Corporation and Hunt Mortgage Group were the initial trio of lenders approved back in October.
Not-for-profit Community Preservation Corporation, which traces its roots to tackling housing blight in New York City in the early 1970s, and ReadyCap Commercial, a lender backed by hedge fund Waterfall Asset Management, joined shortly after.
"We made it a point of being very active in early discussions with Freddie as it developed the Small Balance Loan program," said Greystone's Rick Wolf, a senior managing director working on the initiative.
Greystone closed its first two transactions under the Freddie program in December. At just over US$4.6m, the loans refinanced smaller rental properties in Los Angeles, and the lender is looking to originate more loans including in other key US markets where it already has a footprint, such as Boston, New York and Washington.
"You can chase the market as dumb money would, but Freddie is not out there doing that," Wolf said. "It is not exceeding the market just to get deals done."
PROS AND CONS
Freddie is buying loans of between US$1m-US$5m on properties that have as few as five rental units. Terms include up to 80% loan-to-value with underwriting constraints that are highly competitive with those of banks.
"Lenders are lining up like store-shoppers for holiday sales to get approved by Freddie Mac," said Randy Fuchs, co-founder of Boxwood Means, a research and consulting firm focused on the small-balance sector.
Among its draws are an agency backstop for its Triple A rated securities, lower financing rates for borrowers and a clearly-defined credit box that brings more certainty to the loan closure process, market players said.
And more accessible financing could potentially propel the value of smaller apartment buildings that have lagged widespread appreciation in the past couple of years.
Apartment prices across the US have jumped 16% year-over-year through December, and by 33% over the last two years according to the Moody's/RCA Commercial Property Price Index.
Boxwood's Small Multifamily Price Index, however, showed a much smaller 9% year-over-year increase and a 19% rise over the last two years.
Freddie hopes to complete US$500m-US$1bn in securitizations from the series in 2015, depending on how many loans it can buy.
That may be capped by the number of Mom and Pop real-estate owners who qualify for the Freddie program, particularly since Section 8 and other rent-subsidized properties routinely breach housing regulations. That can damper a building's financing options.
"A common violation in New York City actually is front doorbells," a lender in the sector said, referring to older properties.
"If you can't get new wiring up to each apartment because the building was built ages ago, you won't be able to clear the violation."
SELLING ON THE RISK
A new securitization on the back of the small loan program would be similar to Freddie's existing multifamily CMBS K-deal series, which sells the first-loss slice of risk to private capital investors, called B-piece buyers.
The main difference will be the lower-quality assets that the small balance loan securitization program is targeting.
The B-piece in the K-series is offloaded to private investors at the time the Triple A notes are syndicated, whereas the small balance platform requires the loan seller to keep that risky slice of securities, at least initially.
At first the small balance program is expected to include only one lender that contributes loans to a single transaction, but a mix of mortgages from multiple lenders is a possibility further down the road.
Wolf said he expects Greystone to ink enough loans to lead its first deal in the series before the second quarter ends.
(Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Marc Carnegie)
Recent reports indicating that small businesses are tapping more debt to fund expansions have fueled optimism that mom-and-pops and other small companies may finally be participating in the economic recovery.
It's a welcome bit of news for commercial real estate landlords, who for the last several quarters wondered when - and if - small business would begin to drive meaningful leasing demand for small buildings and spaces, which make up a significant portion of the property market in the U.S.
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