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Fewer CRE Loans Being Refinanced, But Lenders Find Other Ways To Work With Borrowers

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Lenders and special servicers are looking beyond refinancing options when it comes to working with borrowers on commercial real estate loans that are set to mature in the coming months and years, even as those loans increasingly are backing properties facing distress.

According to an analysis by Moody’s Investors Service, the percentage of real estate properties that use commercial mortgage-backed securities debt that are being refinanced is on the decline. Conduit refinance rates were 78.1% and 71.8% in the first and second quarter of this year, respectively, compared to 85.5% in 2019, the year before the Covid-19 pandemic and broader economy upended the commercial real estate market.

“Given the low interest-rate environment that existed before the pandemic, it wasn’t surprising to see so many loans refinanced then, especially if a borrower had a strong debt-service coverage ratio, which measures available cash flow versus debt obligations,” said Matthew Halpern, vice president and senior credit officer at Moody’s Investors Service.

Interest-rate hikes imposed by the Federal Reserve over the past year in the wake of rising inflation have compressed real estate values. Add to that rising vacancy rates and a weaker leasing environment in especially the office sector, and the pressure has increased on building owners with loans coming due in the near term.

“Some loans are performing well from in-place cash flow but are unable to refinance,” Halpern said.

Lenders also have tightened standards in the wake of a more challenging economy and commercial real estate market, with some banks outright saying they’ve stopped new lending to office properties. While fewer loans are getting refinanced overall, there’s been an uptick in the number of performing loans that are past maturity but haven’t been formally extended. That amount, negligible before the pandemic, reached 5.2% in Q1 of this year and 6.9% in Q2.

“That means the borrower is still making interest and principal payments as if the loan hadn’t matured — which typically suggests the borrower is committed to the property,” Halpern said. “Because the overall refinance rate has declined in recent quarters, the number of performing loans past maturity has naturally risen.”

The Moody’s analysis, which only examined CMBS loans, found 16.7% of maturing loans tracked by the firm were delinquent as of the second quarter. That share was much higher in the office sector, with 27.6% of office loans scheduled to mature in Q2 2023 considered delinquent.

 

Source: SFBJ

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Industrial Property Lease Terms Get Shorter And Shorter

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Landlords of warehouse and distribution properties may look to shorter leases to capitalize on burgeoning e-commerce-driven demand, with the pace at which average lease terms are shortening picking up major speed.

A new analysis from Moody’s Analytics notes that pricing and fundamentals of the sector never decreased as a result of the pandemic, and instead posted record high occupancy and rents as retailers clamored to deliver goods faster and more efficiently. E-commerce as a share of total retail sales now stands at a record high of 15.7%.

And accordingly, “landlords may seek shorter lease term lengths to capitalize on this demand, likely looking for flexibility to sign new tenants or renew existing leases at inflating rates while the sector experiences strong rent growth,” notes Ricardo Rosas and Ermengarde Jabir in the report. “This avoids locking in a tenant at a ‘lower’ rate without a boost to their net operating income for an extended period of time.”

An analysis of 101 metros by Moody’s Analytics shows that from 2017 to 2019, the average lease term for warehouse and distribution space changed around the 36 month mark. Since that time, the average lease term fell 20% to 29 months, and the last two quarters of 2021 saw lease terms declining by an average of 4% per quarter. The proportion of newly inked leases from 25 to 60 months in duration declined by 24% over the last three quarters of 2021, while the share of properties with lease terms of two years or less saw a 22% increase. And “leases whose terms fell into the 13- to 24-month range gained the greatest share of the market in 2021, increasing by 14% over the last three quarters,” according to the report.

“On the supply side, these shorter lease terms appear to allow for the renewal of existing leases or to sign new tenants for existing space at rising rental rates,” Rosas and Jabir note.

The biggest decline in lease term lengths was in the Midwest ,which also had the lowest rent levels and the second lowest occupancy rate amongst the areas Moody’s tracked.

“These landlords most likely desire to boost rents in a shorter period of time since they see sustained heightened industrial demand,” Rosas and Jabir note.  “Additionally, tenants may also desire shorter lease terms if they think the market will eventually cool off and do not want to be locked into a particular rental rate while they contemplate business uncertainty and perhaps view this additional warehouse space as a bridge to mitigate supply chain stress in the interim. On the demand side for distribution properties, there is a ‘take what is available and then see’ approach in the short term.”

 

Source: GlobeSt.

 

 

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