‘No Good Choices’: Owners Of Maturing CMBS Loans Scramble To Find New Debt
A large batch of multifamily CMBS debt is coming due in Dallas-Fort Worth this year, leaving owners grappling with the challenge of securing new loans amid higher interest rates and a scarcity of capital.
DFW’s multifamily market is notoriously robust: The region has seen strong rental rate growth, high levels of occupancy and a rush of investor capital over the past few years as residents flock to Texas and rising prices relegate would-be homebuyers to rentals.
But despite strong fundamentals, owners of multifamily assets are not immune to rising interest rates that challenge refinancing across the nation. Those approaching the end of their loans may find their options are slim, even if their property is performing well on paper.
“[Owners are] left with no good choices,” Keith Van Arsdale, president and CEO of Dallas-based BMC Capital, said in an email. “Many owners are being forced to sell their assets rather than take the hit on purchasing a more expensive interest rate cap for a refi loan.”
A sampling of data provided by Trepp for DFW shows there is close to $96M worth of outstanding CMBS debt spanning 13 multifamily properties scheduled to mature in 2023. Trepp’s data represents public deals and does not include private loans or those held by institutional investors, a spokesperson told Bisnow.
Though loans backed by CMBS represent only a fraction of the outstanding multifamily debt that exists in DFW, there is $1.9B worth of securitized multifamily loans set to mature this year. That places the Metroplex second only to New York City in volume nationally. That city has $2.3B worth of near-term maturities, according to Cred IQ data reported by Commercial Observer.
The amount of CMBS debt coming due in 2023 is indicative of how opportunistic the DFW market was in 2013, when many of these 10-year loans originated, said Amber Sefert, managing director of credit and asset management for Trimont Real Estate Advisors.
Having put the worst of the Great Financial Crisis behind them, savvy investors were drawn to places like Texas, where pricing on assets was low compared to the coasts, Sefert said.
“A lot of individuals probably took the opportunity to buy, trade, sell and get new debt at a very low interest rate,” she said.
None of those owners could have predicted what was to come over the life of their loan.
The commercial real estate industry roared back to life in 2021 after being brought to its knees a year prior. But that glory was short-lived, and many owners now find themselves hamstrung by the Federal Reserve’s aggressive campaign to tamp down inflation through a series of interest rate hikes.
At BMC Capital, Van Arsdale said his team is actively working to find solutions for debt that is scheduled to expire over the next few months. One client in particular, he said, owns a portfolio of smaller multifamily properties securitized via a CLO loan that matures in December.
Despite hitting his business plan “pretty much spot on,” Van Arsdale said the client’s property falls short of the required proceeds to refinance by about $1.5M, all due to higher interest rates.
“We’re unfortunately going to see a lot more of that,” Van Arsdale said.
Valuation uncertainty is also complicating the ability to refinance, said Debra Morgan, a managing director in CohnReznick’s restructuring and dispute resolution practice.
“In the multifamily maturity space, every time you refinance you have to be a seller, you have to go out to the market and say, ‘What’s it worth?’” she said. “And even though you’re not technically selling your asset, the market metrics get applied to it."
There remains a large disconnect between what an asset is worth and where it is priced, though Van Arsdale expects that gap to narrow in the coming months. The market is emerging from a period of historically low rates, cheap debt, high valuations and plenty of cash flow, but now things have reversed, and pricing has yet to catch up.
“If you could wave your magic wand and prices drop by 15%, I think there would be a tremendous amount of business,” he said. “The deals going under contract in the market tell you all you need to know — if activity is down, that means prices are too high.”
Neither Trimont nor BMC Capital have any multifamily defaults on their books, but that could change as the year unfolds. Borrowers will likely try to bide their time by requesting modifications or extensions, Sefert said, which in most cases requires the loan to be transferred to a special servicer.
Whether it is in the best interest of a special servicer to foreclose on an asset depends on why a loan is in default, Sefert explained. If a property is otherwise performing, but rising interest rates are preventing a borrower from paying down debt, the servicer will likely opt to find a workout.
“I do think there’s a possibility that some of these could get extended or slightly restructured with some additional time that gives some of these borrowers an opportunity to refinance,” Sefert said, noting that loans transferred to special servicers are often returned to the master lender once the deal is modified or extended.
Owners have a few options when they are unable to pay off their loan by its maturity date, Van Arsdale said. They can write a check that fills the capital gap needed to refinance, though most clients are hesitant to do so, he said.
Another option, which Van Arsdale and Sefert expect to become more common, is to request an extension on the loan and hope that the special servicer will honor the existing interest rate.
Van Arsdale’s client will likely need to request a 30-60 day extension once his loan comes due in December, though there is no guarantee interest rates will be any lower at that point.
“Will the market be similar to where it is today at the end of the year? I have no idea,” he said. “If I had to bet you a nice steak dinner, I would probably say that obviously rates are going to be higher.”
Extensions often include terms that put the lender in a better position once the loan matures. They may ask for the borrower to make amortization payments on the unpaid principal balance, Sefert said, or they could require additional reserves or capital.
Some may also tack on interest, Van Arsdale said, a callback to the “blend and extend” method undertaken by lenders in 2009, which combines a current interest rate with a new one and lengthens the terms of the loan.
“I think there’s going to be a lot of willingness to work with borrowers,” he said. “If you’re a borrower and you’ve acted in good faith and you’ve executed your business plan, it’s simply that rates are higher — that’s it.”
Refinancing challenges could also lead to an uptick in loan assumptions, Morgan said.
Assumptions occur when a property’s existing debt is transferred to a new owner, which is an attractive option for buyers given the historically low interest rates attached to many CMBS loans, she added.
“I think we are going to see a lot of people do assumptions because the existing debt is affordable versus today’s debt is not affordable,” Morgan said.
How borrowers choose to resolve distressed debt may come down to how long they’ve been in the game, Morgan and Van Arsdale said. A surge of new investors entered the multifamily space when times were good, and some of those borrowers may have a hard time surviving the downturn.
“Anybody who bought property since Covid should be on the watchlist,” Van Arsdale said. “We work with a lot of investors that are individual syndicators, noninstitutional, middle-market, and there’s a lot of them who frankly aren’t equipped for this, and that’s probably the scary part.”
CMBS delinquencies saw a sharp uptick in February after increasing only moderately in January, according to Trepp research. The February jump of 18 basis points to 3.12% was the second-largest increase since delinquency rates skyrocketed in June 2020, per Trepp’s report.
Office and retail tend to garner the most attention when it comes to CMBS distress, but the delinquency rate for multifamily loans is also on the rise, with Trepp data showing a 27 basis-point increase in February to 1.83%
In late February, a $271M loan backing 11 Blackstone-owned apartment buildings in Manhattan was sent to a special servicer, signaling the potential of an elevated distressed rate for CMBS loans secured in the NYC area. The area’s rate currently stands at 0.71%, according to Cred IQ data reported by Commercial Observer.
By comparison, DFW had a 0% multifamily distress rate in December, per Cred IQ, one data point that is likely to inspire confidence among lenders who may otherwise doubt the strength of the market.
“We still don’t have enough housing for everyone, and I think that as a whole, DFW will get through this refinancing event,” Morgan said. “Our lenders will work with the sponsors to weather the storm because they believe in the market.”