Participants at the CREFC (Commercial Real Estate Finance Committee) annual conference in June, highlighted the troubles that include weak demand, rising defaults and growing difficulty in refinancing maturing loans, Yardi Matrix writes in a special bulletin.
“No matter how well loans are performing, takeout financing will be difficult,” said one panelist at the meeting of CRE Finance Council’s Annual Conference in New York. “You can’t see (mortgage) rates shift from 2.5 percent to 8 percent and not see meaningful consequences,” said another, Yardi Matrix reports.
CREFC hosts two major industry conferences each year (January and June), that are the meeting piece for leading industry participants representing every market sector.
The Yardi Matrix bulletin says sharp increase in interest rates starting in the spring of 2022 “has left many loans underwater as property values decrease and borrowers are unable to pay off maturing loans without putting up extra cash.”
Commercial mortgage volume is down 74 percent year-over-year and “and many borrowers are trying to find ways to extend existing loans rather than take out new ones at current rates.”
Multifamily Floating Rate Loans
Loans originated seven to ten years ago had conservative underwriting and benefit from rent growth, and therefore have fewer roadblocks to being refinanced.
Some CREFC panelists predicted a reckoning concentrated in 2020-22 vintage floating-rate loans that financed multifamily and industrial purchases at historically low acquisition yields in hot markets such as Phoenix and Salt Lake City.
“You need tremendous growth to make the numbers work” to refinance those types of assets, said one.
Most of these high-risk loans will be coming due in 2024 and 2025, which means that the next 12-24 months will be critical in determining how the situation will play out and the severity of delinquencies.
Conclusion – Commercial Real Estate Financing
“Right now, the uncertainty in pricing that has stalled deals also is preventing a wave of action on the default front.
At some point, trades will start and set pricing standards. When pricing is set, “the dam will break,” but that remains months or quarters away, writes Paul Fiorilla, Director of Research, Yardi Matrix.
Yardi Matrix researches and reports on multifamily, office and self-storage properties across the United States, serving the needs of a variety of industry professionals. Yardi Matrix Multifamily provides accurate data on 18+ million units, covering more than 90 percent of the U.S. population. Contact the company at (480) 663-1149.