August balloon payoff increase might just be a ‘blip’: Trepp

The percentage of CMBS loans paid off on their balloon dates increased for the first time in four months in August, but the increase could just be a “blip” and the rate could “sag further” in the coming months, according to Trepp.

The August rate jumped to 68.4 percent from 55.6 percent in July, with the latter representing the lowest reading since December 2015 and the fourth straight monthly decline (following an increase in March).

Trepp attributed the recent dips to “the fact that many of the loans now slated to mature are 10-year loans from 2006 that have not been able to be prepaid during their open period.”

“As we continue through 2016 (and later 2017), maturing loans should possess lower credit quality than at origination due to the fact that they were originated later in the 2006/2007 lending boom,” analysts wrote. “In addition, the loans that get to maturity are likely to be the weaker performing properties as most higher quality properties would have prepaid or defeased prior to reaching their balloon date… on this basis, it would not be surprising to see the payoff rate sag further in upcoming months.”

When CMBS loans do not fully amortize, borrowers are expected to refinance at the balloon date. But that doesn’t always happen. Before the Great Recession, the payoff rate stretched as high as 80 percent, while the percentage dipped into the high 30s during the thick of it. (The chart from Trepp at left provides a more recent snapshot). 

The August tally was above the 12-month moving average of 66.5 percent. But, as Trepp noted, “this August bump may be a blip on the radar by the time all is said and done.”