The amount of retail Commercial Mortgage-Backed Securities (CMBS) delinquencies has reached an all-time high of 10.16%, according to Trepp, a leading provider of commercial mortgage information, analytics, and technology. Velocity Retail Group has watched, analyzed, and predicted this continued increase in delinquencies since shortly after the financial meltdown in the 4th Quarter of 2008.
The incredible growth of 2005 – 2008 was a period of rapid escalation in land value, construction costs, rents & retailer expansion. This economic prosperity created values that very clearly created an economic bubble that was not sustainable. Rents were high, cap rates were low, aggressive lenders were plentiful in providing debt at historically high loan-to-value (LTV) rates (ranging from 80% to 100% of the value of the property in many cases).
It’s no surprise that with decreasing rents and increasing vacancies from early 2009 through 2011, more CMBS borrowers than ever before have found it troublesome to keep current on their mortgages. In the past, borrowers have run on reserves but many now find themselves out of staying power.
The solution for these delinquencies may depend on the quality of your asset. Well-located and well-leased “A” properties will likely be able to be refinanced or restructured as there may be enough equity to refinance. “B” properties or other similar assets where location may not be as strong and leasing activity is a bit slower may require a borrower to put up significant “new equity” to meet today’s lender requirements of 65% to 75% LTV levels. Lenders seem to be working with the stronger property owners in refinancing scenarios where the owner raises new equity or brings in new equity partners. It will also put very significant foreclosure risk on less strong owners of property who have more limited resources to attract new capital. “C” properties in distress will very likely be foreclosed and many will turn into non-retail alternative uses.
The good news is that over the next several years we will eventually see reductions in these delinquency rates. The real key will be to see how aggressively (or not) the federal government will allow capital markets and lenders to work with borrowers in refinancing scenarios. With unrest in the European financial markets and an upcoming emotionally-charged presidential election in the United States impacting the global economy, it is unlikely that banks will be able to resolve all of their financing issues quickly. Significant new equity will be required.
Owners of properties facing financial challenges have decisions to make. With the right information, a strategy can be mapped out to achieve the best result for your asset and investment. To learn more, contact Darren Pitts at 602-682-6050 or via e-mail at email@example.com.