Refinancing opportunities growing for non-bank lenders, says executive
Amid continuing volatility in the commercial real estate space, a big wave is looming: almost $2 trillion worth of CRE loans across the country are set to mature in the coming three years, a trend that’s almost certain to present plenty of challenges for lenders and borrowers alike.
Commercial real estate services firm CBRE expects the majority of those loans to be extended – but forced sales are also likely to rise as lenders lose confidence in borrowers’ ability to repay their loans.
About $540 billion of CRE loans are due for maturity in 2024, according to a February TD analysis, followed by a further $535 billion next year. It’s clear that a “potentially bumpier road” lies ahead, the bank said, particularly in a beleaguered office market whose woes show little sign of fading.
Plenty of banks and financial institutions are also seeking to shed commercial exposure from their real estate lending portfolio – resulting, according to a prominent commercial lending executive, in a diminishing number of options to refinance debt even as the need grows.
Alex Horn (pictured top), managing partner and founder at BridgeInvest, told Mortgage Professional America that with over two years having passed since the Federal Reserve started hiking interest rates – and 12 months since its key rate hit its current high – the idea of high rates being a short-term phenomenon was beginning to fade.
Instead, lenders and borrowers are starting to come to grips with the reality that higher rates are going to be around for a longer period, according to Horn. “And so in the last 12 and 24 months, you saw a lot of institutions that were giving modifications or extensions to the existing loans with existing borrowers – with the idea that tomorrow or next year will be better,” he said.
“The staggering statistic is that over 40% of loans that matured in 2023 had some sort of modification or extension. It’s a big number, and [for] those loans that have now seen one extension or second modification, institutions are starting to say, ‘Hey – it’s time to get this off our books.’”
Refinancing to pick up pace in the year ahead
The last 120 days in particular, according to Horn, have seen banks and other institutions adopt an increasingly impatient approach in requiring their borrowers to refinance, a trend that’s resulting in an uptick of borrowers selling their properties, “taking haircuts” and moving on.
Blackstone Inc. is selling commercial mortgage bonds to help pay for its planned $10 billion purchase of AIR Communities, an apartment landlord. https://t.co/sQGxLglotg
— Mortgage Professional America Magazine (@MPAMagazineUS) July 12, 2024
As the year progresses, the current trickle of refinances is expected to escalate into a “tsunami,” Horn said, with loans modified in 2023 set to be added to the regular flow of refinancing that needs to happen. “[At the] end of Q4 2024 and all of 2025, we expect that it’s going to be a very, very busy end of the year on the commercial financing side,” he said.
High-quality deals, such as those in which the sponsor has a deep and productive relationship with their banking institution, are usually safe for the borrower because banks are more flexible on those loan types.
Which types of commercial loans are currently the safest?
An interesting aspect of the current market, though, is that the second type of deal that’s seeing the most flexibility are those in the lowest tier. “The worst deals on the balance sheet are actually those that are getting sort of equal flexibility,” Horn said, “because the financial institutions don’t want to recognize the loss of selling those.
“So really bad deals are actually staying on the books for longer as well. What that means is those getting squeezed, who are actually getting forced out, are the deals that are performing OK – transactions that might just be slightly lower than the expected debt yield or have reached maturity.”
A “duopoly” of sorts is at play, he said – the very worst deals are staying on balance sheets for longer, while those in the middle and performing moderately well are being forced out.
Indeed, next year is gearing up to a be a busier year than 2024, Horn said, with rate cuts likely to accelerate the volume of refinances and open up the door for more people to seek new options. “The bigger the rate cuts, the more transaction volume we’ll see,” he said.
“But inherently, even if the markets don’t change, even if rates stay more or less where they are, you’re still going to have a need for refinancing.”
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