$6B in Miami CMBS Loans Are About to Mature. Here's the Upside.
If you want to understand why the once intimidating “wall” of commercial mortgage-backed securities (CMBS) set to mature between 2015 and 2017 has pretty much crumbled, take a look at Miami.
Close to $6B in CMBS loans will come due in the next two years in this gateway city, yet thanks to an explosion in foreign investment, rock-bottom interest rates and price appreciation that has pushed valuations close to pre-recession peaks, that reckoning no longer portends economic doom. Instead, the wave of CMBS maturities has turned into an investment opportunity.
“I haven’t met many people in real estate who aren’t happy at the moment, especially in markets like Miami,” says Raymond Torto, Harvard University Graduate School of Design lecturer and retired global chief economist for CBRE. “That wall of CMBS maturities we were so worried about is turning out not to be so tragic after all.”
A short three years ago, that wasn’t the case. Then, economists were warning of the potential for mass default nationally when hundreds of billions of CMBS loans—almost all ending with balloon payments—were to come due. Even though interest rates were low, it looked then like developers might face a valuation gap—property prices still far below the peaks set during the heady days of 2006 and 2007. This was particularly true for retail and office properties, which in 2012 and 2013 were fighting off the loss of big-box stores to Internet shopping and swallowing the downsizing of trophy corporate tenants going through layoffs and consolidations.
Today, Miami has seen valuations on commercial properties come close to pre-recession peaks and for some property types hit new highs. Real Capital Analytics estimates that less than 1% of the pending loans should face difficulty when refinancing, although almost 42% will have to find additional capital to close the deal. This indicates that while many properties have not quite reached the prices of a decade ago, it’s no longer such a monumental gap as to threaten deal completion.
“Many of the [CMBS] loans were underwritten very aggressively with minimal or no amortization in many cases, based on 2006 and 2007 peak values,” says Marjie Nealon, a partner and chair of the real estate capital markets group at Miami-based law firm Bilzin Sumberg, the largest special servicer of CMBS loans in the US, “but the lending market has come back to meet the refinance concerns of many of these loans and absent some major negative economic event, we should be able to get through these maturities in pretty good shape.”
Aztec Group managing director Jason Shapiro points in particular to the strength of the city’s lodging and multifamily sectors, where prices are matching and exceeding pre-cash peaks. “The office sector has lagged a little, but you’re starting to see rents and income move up because there’s almost no new construction,” Jason tells us.
In Miami, foreign money has been the principal driver of rising valuations. Investors, from Brazil and other parts of Latin America in particular, have been aggressively seeking out safe havens for their money. And even the strong dollar and falling global oil prices have not yet deterred their zeal for both residential and commercial properties.
Additionally, CMBS origination in the US has exploded in recent months with estimates that it will top $100B in 2015, injecting more capital into the system. CBRE vice chairman capital markets Charles Foschini notes that there are 40 lenders issuing these securities now, perhaps five times what it was pre-recession.
Take, for example, Aventura Mall, a close to 300-store, high-end retail mall nestled in the former swamplands between Miami and Fort Lauderdale. Using CMBS, the owners, Simon Property Group and Turnberry Associates, were able to refinance and increase their loan $770M to $1.2B so they could make Aventura the nation’s second-biggest mall, with a 241k SF expansion that still needs to be approved by local government.
“There’s an opportunity now with these smaller, independent shops,” Charles says. “But it’s a small window as I anticipate consolidation in the not-too-distant future as the lenders run out of good assets to invest in.”