Commercial real estate (CRE) sectors have encountered a series of challenges, with a considerable number of CMBS maturities coming due. Commercial Mortgage-Backed Securities (CMBS) loans are set to mature amidst rising interest rates and a potential market-wide credit crunch. This wave of CMBS maturities may result in foreclosures, losses, and subsequent litigation.
A Wall of CMBS Maturities
More than half of the outstanding commercial mortgages are due for refinancing in the next two years. In the office property type, $190 billion of the $750 billion outstanding balance of office loans are set to mature in 2023. Concurrently, the CMBS market has taken a hit with regional banks suffering public confidence loss due to the collapse of several institutions. This could potentially lead to a secondary crisis concerning their CRE portfolios.
Navigating the Post-Pandemic Landscape
The CMBS maturities come at a pivotal moment as rising interest rates and the shift to hybrid work models are influencing the commercial property sector, particularly office properties. Such post-pandemic circumstances, combined with the rising prevalence of variable rate commercial mortgages, may pose challenges to debt service and the recovery of the sector.
However, not all commercial real estate is experiencing the same difficulties. For instance, while office vacancies are high, the industrial construction sector remains robust, indicating some resilience in the face of economic uncertainty. Nonetheless, the combination of these factors and recent banking issues is pushing CMBS investors towards top-quality CMBS.
Impact on the CMBS Market
The CMBS market has seen new issuance falling and spreads widening, with the Q1 quarterly volume for domestic, private-label CMBS down 79% year-over-year to only $5.98 billion, a level reminiscent of 2012. The performance and ratings of CMBS will depend on a variety of factors unique to different properties, including building location, tenant/industry mix, and rollover risk.
Potential Litigation from Valuation Changes
Changes in valuation can significantly impact investor rights in CMBS deals. As these maturities approach, disputes may arise over whether triggering events have occurred, appraisals, and whether control rights have shifted. These potential litigation factors only underscore the importance of understanding the intricacies of CMBS maturities and their implications.
Looking to the Future
As the commercial real estate industry braces for a wall of CMBS maturities, it’s crucial for investors and stakeholders to understand the potential implications. With significant shifts in real estate valuations signaling potential litigation, the landscape is rife with both challenges and opportunities.
