The approaching tidal wave: Maturity defaults in CRE loans


Bloomberg has reported this week that “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic.  The U.S. South has the most maturing loans with 60,893 mortgages valued at $96 billion coming due on shops, offices, hotels, apartment buildings and land . . . .The West is second with 20,549 mortgages maturing for a value of $35 billion.  Commercial property owners are struggling to pay debt as the recession reduces demand and forces landlords to cut rent. . . . Properties worth more than $108 billion were in default, foreclosure or bankruptcy as of July 8, according to data firm Real Capital Analytics Inc.  .  .  .  U.S. commercial property prices fell 7.6 percent in May from a month earlier, bringing the total decline to 35 percent since the market’s peak, Moody’s Investors Service said last week.  .  .  . More than 5,000 commercial properties in the 10 biggest U.S. metropolitan areas got at least one default notice in March, marking the first time that’s happened in First American records going back to January 2003. ”

This looks like an approaching tsunami to me for banks, special servicers and other CRE lenders. 

Now we’re seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.   (The smart lenders are using this as an opportunity to review their loan documents and fix anything that could block or hamper later enforcement through foreclosure.) 

These extensions are, essentially,  bets that the economy will recover soon enough that these lenders won’t have to foreclose or do larger scale workouts.  Extensions are also protective measures for each individual institution —  by postponing any writedown, the lender preserves its own capital and protects its short term solvency.  And it is possible that the massive governmental stimulus will reinflate the economy and the demand for CRE (though I am skeptical about this).

But I can’t figure out where the needed replacement financing is going to come from, especially since the CMBS market appears to be dead, leaving a huge gap (perhaps 40%) in the financing available for CRE.  (Few banks have an appetite for more real estate loans.  Haven’t heard a lot about life insurance companies wanting more  CRE loans either.  One of my partners has done one of the two covered bond deals completed to date, and thinks that structure is unlikely to replace the missing CMBS financing.)   Do any of you have any ideas about what will replace this missing financing?


30 Responses to “The approaching tidal wave: Maturity defaults in CRE loans”

  1. 1 Sam Tayloe July 30, 2009 at 9:31 pm

    Fannie and Freddie are only going to be looking at A & B properties and have already dropped their LTV to 65-70% with 1:25 DCR. But, few people are looking at the FHA 223f program which remains at 85% LTV and 1:17 DCR due to “old experiences”. FHA rates are similiar but with 35 year amortization.

    This where we are putting our efforts. Closing is only taking about 45 to 60 days. GIVE US A CALL.

    PH. 214-205-5510

    • 2 Martin Frame August 4, 2009 at 2:46 pm

      CMBS will be back, In my humble opinion sooner than later. Freddie Mac has securitized a large portion of their 2008 production which recently priced (June 5th) and sold (6 times over subsribed). Granted it is backed by the US gov, it is a first step. New CMBS will be a bit of old and a bit of new, the new being the fact that issuers will have to put some skin in the game to get investors to invest along side them. TALF will also help with the CMBS both new issues and older vintages that qualify for the plan, but it needs to be extended.
      The following is a quote from Apartment Finance Today:

      “To stop history from repeating itself, the Treasury Department is reportedly working on new regulations for conduit lenders. The proposed regulations include requiring lenders to retain a meaningful level of risk, maybe 5 percent of the credit risk sold to investors, as well as not allowing them to pay compensation until the performance of the loans has been realized. No formal announcements have yet been made.”

      There is still alot of mess to clean up from the days of Irrational Exuberance…but we are getting there.

  2. 3 ez payday loans August 1, 2009 at 11:23 pm

    Just a thank you for the work you have put in! i will definately be back.


  3. 4 Geoffrey Silverstein August 3, 2009 at 4:10 pm

    Most maturing loans will have to be extended. Those that can cover current interest rates will continue to be carried on the books as performing loans; those that can’t will be foreclosed and sold. This is one of the biggest problems today in CMBS; senior debt holders (AAA supersenior) want to be paid off, while junior CMBS holders want to extend indefinitely. And banks have even less room to maneuver, given their higher LTVs and the inherently lower stabiity of recently constructed/renovated properties.

  4. 5 Patrick Schlehuber, CFA August 3, 2009 at 9:42 pm

    The “Gap” in the financing bucket will come from multiple sources, some of which are not evident in today’s market (a la government programs, renewed CMBS issuances, etc.). However, I believe a very significant portion of the refinancing “gap” is going to come from the current owners of real estate and current lenders of real estate by way of them ultimately recognizing the losses in value. “Blend and Extend” or “Pretend and Extend” is a short-term fix to a much longer term problem. The long-term problem, which is basically that people paid too much for properties over the last few years, will eventually have to be recognized for many, if not most, properties.

  5. 6 Chris August 4, 2009 at 2:31 pm

    I think you’re going to see some form of CMBS resurrected in the future, if the Gov’t will get out of the way. In it’s purest form it is a great tool and a good investment. It all comes back to initial underwriting (no more 90% LTV, interest only), reputable ratings, investors who understand what they are buying, and a refrain from the re-securitization and re-re-securitization that gave CMBS such a bad name.

    • 7 SAM August 13, 2009 at 5:06 pm

      It was government “getting out of the way” that was instrumental to the current problems in the first place. CMBS will be back because it’s a wonderful, workable idea when sane rules and regulations are in place and enforced.

  6. 8 Barry Smith August 4, 2009 at 6:46 pm

    Maura, I agree that a tsunami is approaching. It is only a matter of time until the commercial real estate sector is THE topic of every news cast.

    My company, is a loan sale advisor.

    We deal with community and regional banks to dispose of their unwanted commercial real estate loans. We are seeing that some banks are positioning themselves to unload product, but many are still not yet able to sell into this market environment due to the hit they will need to take as a result of the market pricing ( your comment of “short term solvency” is spot on).

    Delaying selling, or simply offering extensions will probably prove to be a fatal mistake.We are advising that selling into this market will prove to be more profitable than waiting to see what happens.

    The bottom line is that until lending comes back, we will stay at this low level of transactional activity.
    We believe lenders will slowly enter into the market to finance, but they must first deal with their existing portfolio.

    There are no clear or easy solutions. Values have eroded and with that erosion comes pain for both borrowers and lenders. Opportunistic plays are really the only deals that will get done for the near future.

    Thanks for the forum.

    Barry Smith

  7. 9 Sean O'Shea August 4, 2009 at 6:47 pm

    Denial……….we have all heard the joke that, “It is not just a river in Egypt”; but in a chalenging real estate environment, an investor’s ability to have clarity about creative solutions is really critical. If a maturing commercial loan is moving, on-a-monthly-basis,toward maturity with no successor debt in sight……default strategies and even a pre-foreclosure strategy should be on your agenda.

    While foreclosure would have been unthinkable in the recent past, the inability to secure acceptable replacement debt solutions may dictate this new reality. As you review options, there is one new solution, that merits consideration. You can defer your “cancellation of debt” and “depreciation recapture”, the unintendeed consequences of a commercial foreclosure, by utilizing provisions of IRC 1031 to acquire, with high leverage, (with a 10% downpayment or less) investment grade credit tenaant assets in a reverse 1031 exchange or trade to defer your unavoidable tax consequence if you cannot effectively place new debt at this time. Check it out.

  8. 10 Carolyn Pianin August 6, 2009 at 1:05 pm

    For the loans that are not extended… the “gap” may not ever get covered. (And, why should it?)

    So, the bank will take the property back and then sell the real estate as REO, at a value most likely a little less than current value (think distressed sale). This will provide an opportunity to a new buyer.

    At this point, the bank will probably have to provide a new loan to the new buyer, but the LTV will make sense and be based on today’s underwriting standards (1.40x DSCR, 65% LTV, 10% Cap Rate). And, if you think about it, the new buyer will be able to lease the building at lower rents (in line with what is probably the current market) since their investment will have been right-sized”.

    • 11 Jim Ciotti August 13, 2009 at 5:11 pm

      Carolyn Pinon:
      It’s been a while since we have communicated and hope all is well with you. I agree with your position re: CRE market and what happens next!

      We have been down this road before and guess what, we are here again! Dustressed buyer will absorb, reposition and offer more product at realistic price points to the market. However, the major difference between RTC days and now…. the price of this debacle… reasonable estimates are running $6.3 Trillion total over the next 3-4 years!

      That is one sweet CRE opportunity for those of us seeking to capitalize on the distressed side and moving into recovery.

      Everyone wants a free ride, the Banks, (what used to be) Wall Street and the Insurance companies.


  9. 12 Patrick Simons August 6, 2009 at 5:02 pm

    Assuming that we’re not in a “new paradigm” in which capital doesn’t require a return, there is no replacement for this “missing financing.” What’s created this log jam we’re in is the Feds trying to reduce the pain by massive injections of public-sector capital and looking the other way with the larger banks. The only way CRE transactions get restarted is if/when the Feds back off and let the cycle unfold like we had with the RTC in the late ’80’s-early 90’s. Sure, it will be a massive dose of pain. But better that than the numbing pain of the extended gridlock we have right now.

    Patrick Simons
    Strategic Residential Advisors

  10. 13 annoyed August 6, 2009 at 6:20 pm

    please dont use this blog as a forum to promote your lame companies, thats not what blogs are for.

  11. 14 Sherry Swingler August 7, 2009 at 4:10 pm

    If you know any company that has a portfolio of non performing loans I have a patent pending technology that can analyze the portfolio of any size. This is a time saving and cost effective third party approach to analyzing the loans and watching your bottom dollar. It is currently being utilized at the largest online auction house for FDIC loans. This technology has different uses. Please call or email me for more information I would love to share this technology with anyone in commercial real estate it is going to be the wave of the future.


  12. 15 Trevor Hall, Jr. August 7, 2009 at 6:06 pm

    Someone coined the term “reflation” to describe the current goals of both fiscal and monetary policy. It is hoped the Fed and this administration will be lenient with banks and other lenders so that flexible solutions can be deployed. If so, value lost can be recovered. Each loan and mortgage is unique. Geographic characteristics vary considerably. For opportunistic investors and those looking to hedge against future inflation, conditions are ripe. It is time to do the research, seek quality properties and make your move. It would also please me no end to hear government officials say that the second stimulus must come from the private sector.

  13. 16 Chris T. August 8, 2009 at 3:36 pm

    Banks are subject to re-apraisal rules when extending loans and therefore, will need to make difficult choices with respect to carrying newly extended loans at LTV ratios that exceed the supervisory limits. All such loans are limited to specific multiples of regulatory capital and all such exceptions require quarterly reporting to the board of directors. It is inconceivable that the regulators will allow banks to pursue an extend and pretend strategy on a wide scale.

    While CRE valuations are clearly depressed in response to higher risk premia being applied to deteriorating fundamentals, banks will likely argue that transaction volume is insufficient to draw reliable value conclusions near term. Accordingly, as long as a property can cover debt service adequately it should qualify for a maturity extension notwithstanding a high LTV ratio. This argument can be reinforced when the loan is guaranteed by a person or entity that has liquidity amd cash flow from other sources.

    Having said all of this, the market is still in decline and axiomatically, it is better to recognize a loss early as a loss mitigation strategy when this is the case. Moreover, the additional provisioning required to support high LTV loans or loans supported by underperforming collateral is a drag on earnings. In some cases, it may be better to take the loss now, repatriate the capital and reinvest it. A note sale with new financing ahead of 40% equity on a discounted sales price might be an attractive reinvestment strategy alternative under the circumstances.

  14. 17 Fred Cordova August 10, 2009 at 7:41 pm

    While there is no capacity in the market to replace the existing debt, I believe that there will be a new CMBS structure and it will happen sooner than later. Some $3-4 trillion of debt has to be recapitalized in the next 5-7 years. As I write this, major national investors are handing back the keys (Tishman, Hines, Broadway, Maquaire) while others were forced to sell to the owners of the mezz debt (Macklowe, Cabi). These are the first throws of the greatest recapitalization in history. Others are providing preferred debt now or preferred equity to investors who need capital to underwrite new loans (pay off old loans). Returns are in the mid teens. REIT’s are raising billions to buy CRE when this tsunami comes. Private capital, investing in the new form of CMBS funds to get mid teen returns is not far behind. Already such funds are being created with institutional money and they are waiting patiently for buying opportunities. The end result will be a smaller tsunami than most people think and a much shorter window than most people think, but it will be ugly nonetheless.

  15. 18 Alby August 10, 2009 at 8:03 pm

    Many of the eventual bank or conduit foreclosure sales, sales in lieu of, or assets that are able to be recapitalized with more equity will all require replacement financing which will come from the life companies, mortgage or other REITS, banks and possibly securitization down the line. Given the smaller size of the available capital, rates will go up, transactions will remain less active and prices will stay high.

    Regarding the conduits, requiring skin in the game or deferred compensation are good ideas that would have helped postpone or mitigate the collapse. The TIC market and private REITs should also have been required to follow that simple investment mantra. It certainly makes sense that the sponsor should only get paid after the equity gets their capital back. The lack of restraint just drove volume at the sacrifice of security. In addition, maybe fewer interest only deals, tighter LTV ratios, and shorter amortization schedules would also have helped avoid the crisis. Most of the life companies and certain other investors have been following these underwriting frameworks more closely as a group since the last major downturn. In fact they are still lending, albeit under more stringent guidelines, but some still have some excellent rates reflected by the flight to quality which has defined the current environment across the credit spectrum.

    We are financing assets here in the Midwest through our life company correspondents and with other mortgage investors and would welcome the chance to help finance quality deals underwritten conservatively going forward. If you have a property that can be refinanced under reasonable terms, email me at NorthPoint Capital is an experienced mortgage banking firm based in Chicago. We are also an approved FHA lender and finance most types of income producing property.


  16. 19 Mark August 13, 2009 at 3:48 pm

    Those who think CMBS will be back soon or in a form anywhere near their 2004-06 appearance are dangerously out of touch with reality. I’m a life company lender who also securitized a portion of our portfolio and production. It was shocking to see the headlong rush of some originators and issuers to sell loans into CMBS. The current state of the market is the result.

    What will replace CMBS? (1) significant borrower cash equity in a deal, and (2) conservative portfolio lenders who will be available through thick and thin. It will be a loooooong time before what we saw in the past few years will come around again.

  17. 20 Tom August 13, 2009 at 7:47 pm

    First the lenders must own up to their losses. Then they can sell the property to overseas investors. Is that not what happened during the RTC crisis?

  18. 21 Charles Cecil August 14, 2009 at 1:50 am

    We have three major lenders preparing to come back into the market. However, they will be using current valuations (on current NOI), and max LTV of 50% (but no capital per property limits. We will be offering Mezz loans from our special purpose vehicle to go with them to take total LTV to a max of 70%. These senior loans are going into new issue CMBS. So, we are on the way, but extensions are the rule for the moment. Nevertheless, our CMBS team expects the next two years to be full of delinquencies and defaults.

    • 22 Mary Lou Beemer December 29, 2009 at 6:20 pm

      I would like to learn more about your mezz loan program. Please either email the information to me at: or call me at 650-948-7100. Thank you.

      Mary Lou Beemer
      Beemer Properties
      2400 Sand Hill Road, Suite 101
      Menlo Park, CA 94025
      Telephone: 650-948-7100

  19. 23 sleeper August 14, 2009 at 6:20 am

    the values are inflated
    the values will fall
    and some of those here today
    will have no value left at all

    such is life.

  20. 24 David Repka August 16, 2009 at 10:22 pm

    The biggest problem facing commercial real estate is the capital markets’ lack of liquidity. CMBS issuance went from $230 billion in 2007 to $12 billion in 2008 to less than a billion dollars YTD in 2009 (send an e-mail to and I will supply you with my research source materials).
    Higher vacancies and higher reserves can be built into financial models to determine an underwritten cash flow (UCF). We can apply a stressed interest rate and a higher than normal debt coverage ratio to the UCF to determine very conservative maximum loan proceeds. As delightful a math exercise that might be… when there is no functioning capital market to provide liquidity, there are no transactions in some market segments.
    What used to get easily financed at 80% of cost now will only justify 40-60% LTC financing based on the new ultra conservative underwriting standards. This makes commercial real estate a “rich man’s game” once again and will knock all the amateurs out of the business. For those with massive amounts of cash and a long time horizon this is the greatest buying opportunity of our lifetimes.

  21. 25 lawrence selevan August 17, 2009 at 11:25 pm

    We have a research report indicating that $1.2 bb of CMBS that matures in 2011 and 2012 will not be refinance traditionally through CMBS but through extensions of the TALF program.

  22. 26 Rob @ Stone Quarry Mill January 4, 2010 at 11:05 pm

    Synopsis of above alternative thought? Wait and see. We can perform now with a sum of $ 50 + MM available (cash)-single investor-close by May 2010. Seeking west coast entitled development land (prefer some oceanfront exposure)for immediate purchase. Will buy at realistic current (marked to market) value not former projected market value. Fee only not partnership. Thanks.

  23. 28 James R. Ciotti January 13, 2010 at 2:22 pm

    There is a new brand “RECSI” comming into the finance space to replace “CMBS/RMBS/ABS/
    REMIC/MBS! Real Estate Collateralized Security Instruments will be the vehicle going forward to platform critical financing in the RE markets.
    Globalbanc Corporation (GBC) has created and is assembling the first such structure and offering to SWF’s across the globe. Of course the real test is the fist subscription of this investment vehicle! We shall keep the CRE Market appraised of the progress of this offering through CREO Point site!

  1. 1 Twitted by zerodownreos Trackback on August 6, 2009 at 1:31 am
  2. 2 The approaching tidal wave: Maturity defaults in CRE loans Trackback on August 8, 2009 at 6:27 pm

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Attorney Advertising. This blog is a periodical publication of Maura O'Connor, a partner of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have. The contents are intended for general information purposes only and represent the individual views of Maura O'Connor only. Any tax information or advice contained herein is not intended to be and cannot be used by any taxpayer to avoid tax penalties that may be imposed on the taxpayer.

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