Since 2009, alarm bells have been ringing over the amount of outstanding debt backed by commercial real estate in the US. As of now, $1.4tn (€1tn) of loans are due to mature in the next three years.
Despite concerns over losses faced by banks, US lenders remain less reluctant to lend than in Europe, where a significant amount of outstanding debt is not expected to be refinanced in the next couple of years.
Many deals are still taking place in the US, with banks such as JP Morgan, Citigroup, Goldman Sachs and Bank of America featuring among the main bookrunners at the end of September along with Royal Bank of Scotland, Barclays and Deutsche Bank. UBS, Wells Fargo and life insurance companies such as MetLife are also among the most active lenders in the sector.
A $200m (€142m) loan from MetLife secured against the Water Tower Place mall in Chicago and a $175m mortgage from Morgan Stanley on the Pearlridge Center mall in Hawaii are some examples of the most recent CMBS deals in the US.
Refinance instead of new lending
“Some 90% of the new CMBS origination in the US is refinance, as opposed to new transactions,” says Ralph Howard, chief executive of real estate service firm The Situs Companies.
According to Howard, the average loan-to-value (LTV) in US CMBS is 60% to 65%, with mezzanine originators taking the mortgage up to no more than 75%.
Interest rates on the first mortgage remain relatively low, at 5.5%. “The borrower has a smooth execution, while the second part [of the loan] is much more expensive,” says Howard. He points out that interest rates on mezzanine loans are usually between 10% and 12% and can sometimes reach 14%.
CMBS loan delinquency in the US keeps rising, but at a lower pace than before. According to Moody’s Investor Service’s Delinquency Tracker, the rate rose by 14 basis points to 8.24% in September, but this was the smallest monthly increase in two years, while growth in the rate has remained modest in the past few months.
The number of delinquent loans was 3,971 in September with a total balance of $52bn (€37bn.) “The number and balance of loans becoming newly delinquent remain high,” Moody’s managing director Nick Levidy said in a statement. “But in the past few months, the number of loans that became current, worked out or disposed has increased.”
In Europe, CMBS loans struggle to get refinanced. According to a study published by DTZ Research, the total debt funding gap in Europe’s commercial real estate will be €115bn on a €482bn total over the next two years. DTZ researchers, though, forecast a higher gap, €156bn, should LTV, affected by recoveries in property value, not increase from 60% before the end of next year.
DTZ surveyed 24 European countries, whose total commercial real estate debt was €1.85tr. Over two-thirds of this amount was in the UK, Spain, France and Italy. According to the study, the first two countries will have the largest funding gaps in 2010-2011. “The UK is one of the biggest real estate markets globally, so naturally it has a high level of outstanding debt,” says Nigel Almond from DTZ Research real estate strategy, who co-wrote the study.
According to DTZ global head of research Hans Vrensen, real estate debt in Europe is still hampered by a lack of funding sources compared to the US, where life insurance companies and the securitisation market are also functioning as funding channels along with banks.
“The CMBS market is now more active [in the US],” says Vrensen. “That is not the case in Europe, where differences in structure have left the market effectively shut.”
Gawain Hughes, head of investment funds at DLA Piper, says: “The US has a different picture. Companies like Blackrock were raising funds there since the 1990s.”
Despite their reluctance, though, banks have started lending again in Europe. “We will never go back to the level of debt we had four years ago,” says Hughes, “but it is not 18 months ago, when no one was lending, full stop.”
Charles Roberts, a partner with law firm Paul Hastings, thinks it is difficult to say whether banks will continue lending or try to sell their loans, even if this implies taking a loss. “Issues in Europe are with clearing balance sheets,” he said in a press briefing in London. “It is the same for US banks.” Roberts said banks are “burnt” by real estate debt at the moment, but some of them are still making a profit. The same has happened in the US, where “some banks shut down their CMBS operations and fired a lot of sophisticated employees. Now they are hiring again because some banks have made very good deals.”
