The payoff rate for maturing US CMBS loans hit its highest level in 14 months this March, but Morningstar says it could decline dramatically by 2017 due to high loan-to-values on loans that have yet to mature.
Some $4.17 billion, or about 89 percent, of loans maturing during the March remittance period paid off, but Morningstar expects a payoff rate of about 65-70 percent by year-end — and it could drop by 30 percentage points to 60 percent or below in 2017.
“Though the year has started off well, we believe that refinancing many of the loans scheduled to mature in the latter half of 2016 will be challenging,” the ratings agency wrote in a report.
“Many have LTVs above 80 percent and debt yields below 8 percent, which we believe are reliable barometers of a loan’s likelihood to pay off on time,” and the rate could fall below 60 percent in 2017 based on 46.9 percent of loans having LTVs greater than 80 percent.
“Their successfully refinancing will be very difficult without sharp improvement in cash flow through 2017… [and] refinancing marginal loans will become more difficult because property owners and developers face the potential of higher rates on loans and diminished property values as debt issuance slows and financing becomes more expensive,” analysts noted. “The uncertainty around risk-retention rules, scheduled to be adopted in the second half of this year, also may hamper refinancing borderline 2006 loans into CMBS deals.”
They added, however: “For amortizing loans, there is the opportunity for additional deleveraging through maturity, which may help in some cases.”
In March, 368 of the 439 performing CMBS loans were paid in full at maturity, or approximately $4.17 billion. The 89 percent payoff was the lowest monthly total since April 2015. Morningstar excluded floating-rate loans that have not reached their fully extended maturity date.