Refinance Challenges Expected for CRE Segments

As the 10-year anniversary of the previous market peak in commercial real estate (CRE) approaches, lenders and investors are looking ahead to a wave of refinancing that could spell trouble for the market.

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An estimated $1.4 trillion in commercial mortgages will mature between 2014 and 2017. Thirty percent of these maturing loans are in the Northeast, 20 percent in the Pacific and Southeast regions, and less than 15 percent in the Midwest, Southwest, and Mountain states regions.

In the years leading up to the economic downturn, lenders became more aggressive and eased requirements in order to increase volume and satisfy investor demand for securitized CRE products. Loans originated in 2004 and 2005 generally had a lower loan-to-value (LTV) ratio than those originated in 2006 and 2007. A higher LTV ratio indicates more debt as a percentage of equity and therefore more risk.

Since the majority of these loans have ten year terms, the 2004 through 2007 loans will come due in the next three years.

""Trepp"":https://www.trepp.com/ data show that most CRE loans underwritten in 2013 have an LTV ratio of about 60 percent, while multifamily loans have an LTV around 70 percent. Loans with too high of an LTV ratio may not meet upcoming tighter standards without injecting additional equity.

Multifamily is among the healthiest property segments, so borrowers will face the least difficulty refinancing. Multifamily loans tend to have a higher LTV ratio than [COLUMN_BREAK]

other commercial properties, but the segment is performing well, and demand for rental housing is strong. Multifamily loans in Northeast states could face problems in 2016, and trouble may land in 2017 for Pacific and Southeast states.

The lodging sector is currently performing well, but because of the cyclical nature of the hospitality business and its strong correlation to economic activity, it has significant potential for volatility, Trepp says. These borrowers trying to refinance should be able to meet loan-to-value requirements in 2014 and 2015, but in 2016 and 2017, borrowers may need to inject more equity to meet tightening standards.

Office property loans maturing in 2017 have a much higher LTV ratio than those maturing in 2014. The office sector's recovery has been slow and uneven. Top markets are performing well, but lenders have been more restrictive in secondary and tertiary markets. In 2014, borrowers should have little trouble refinancing, but between 2015 and 2017, refinancing troubles could emerge unless we see significant property value appreciation or a loosening of credit standards.

Industrial properties borrowers may face significant challenges in refinancing. In 2014, the LTV ratios for maturing loans are close to those for recently originated loans, which may limit refinancing problems, but the story changes in 2015. Interestingly, industrial is one of few product types where the LTV ratio for maturing loans decreases in 2017.

Retail could prove the most problematic segment. The LTV ratio for loans maturing between 2014 and 2017 is consistently higher than those of recently originated loans. Retail market fundamentals are improving slowly, and investor demand for properties has improved. Even so, ongoing economic uncertainty and higher taxes have had a negative impact on spending and retailers, all of which will affect lenders' willingness to refinance maturing loans.

In almost every region of the country, Trepp expects retail borrowers will find it difficult to meet current LTV requirements when refinancing.