Refinancing To Be Much Harder For CMBS This Year

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A CMBS report from Fitch Ratings projects that the refinancing prospects of the category will be ‘materially weaker” in 2024 than in 2023. It’s one of the main reasons that the firm said that CMBS delinquencies would hit 4.50% in 2024 and 4.90% in 2025.

“Over $31.2 billion, or 1,473 of non-defaulted and non-defeased conduit and agency loans in Fitch-rated U.S. CMBS multiborrower transactions, excluding loans to which Fitch has assigned a credit opinion, are scheduled to mature in 2024,” they wrote. “An additional $37.9 billion or 2,437 loans, mature in 2025. Combined, this is approximately 15% of the Fitch-rated conduit and agency universe by balance and is higher than the $26.5 billion that matured between October 2022 and December 2023.”

Fitch used two different scenarios to see if a loan would meet debt service coverage and loan-to-value ratios to gain refinancing “at higher interest rates relative to in-place weighted average coupons (WAC) and at market capitalization rates.”

Although it didn’t reveal details of the estimates, the two scenarios involved having particular minimum DSCR or LTV values.

For the 2024 maturities, Fitch calculated a likely lower refinance rate than the 73% for maturing loans in the 15 months since October 2022. Currently, under 48% can satisfy the minimum DCSR of 1.75x for an interest-only loan or 1.40x for an agency loan. Only 46% can satisfy a maximum 55% LTV (remembering that properties have seen significant drops in valuation while the interest-only loan won’t have seen reduced principal).

In total, about 50% of the $15.6 billion in maturing loans in 2024 wouldn’t be able to refinance. Borrowers would need to add an average of almost a third of the debt in additional equity and 25% under the LTV scenario requirements for refinancing.

“A slowing economy, elevated borrowing rates and negative lender and investor sentiment will pressure CRE property valuations, capitalization rates and loan performance in 2024,” they wrote.

In 2025, refinancing should improve, according to Fitch. Under the DSCR scenario, 75% of maturing properties should be able to refinance, and under the LTV scenario, 51% should. But about 25% of the maturing loan volume, or $9.3 billion, in 2025 wouldn’t be able to refinance. That would mean additional equity of 15% or 10% of the existing debt under the DSCR and LTV scenarios, respectively, would be needed from owners to pass refinancing thresholds.

 

Source:  GlobeSt.

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