In the commercial real estate world, the spotlight is firmly on the imminent maturity of a significant volume of mortgages backing office properties. Over the next twelve months, a substantial $18.6 billion in CMBS office loans is set to mature. Notably, almost 40% of this sum—approximately $7.2 billion—is tied up in large loan or Single Asset, Single Borrower (SASB) deals. Despite a recent rise in delinquencies since early 2023, the maturing SASB loans appear to be weathering the storm with some positive credit characteristics that might help them pay off on time.
The Challenges Facing Office SASBs
Since the start of 2023, the delinquency rates for office SASB loans have surged, surpassing those in other CMBS segments. Historically regarded as the domain of higher credit quality and larger loans, SASB loans have experienced a shift, with delinquency rates climbing to 8.5% as of June, compared to just over 6% for conduit office loans. This rise has sparked concerns, but there are signs that the upcoming maturities may not exacerbate the situation significantly.
A Glimpse of Optimism in 2024
Despite the challenges, the payoff rate for office SASB loans maturing in 2024 has been relatively high. A notable 56.4% of these loans, by loan balance, have successfully paid off through June. For the 43.6% that didn’t, all have managed to secure extensions. This typically indicates that servicers believe the underlying collateral will improve over time or that borrowers are willing to inject additional capital into the properties.
So far in 2024, $5.7 billion in CMBS office loans have reached full maturity, with SASB loans constituting 15% ($1.1 billion) of these. While this share is relatively low given SASB's growing prominence over the past decade, the figure is expected to increase significantly in the coming months.
Favorable Indicators for Upcoming SASB Maturities
Next year, $18.6 billion in CMBS office loans will mature, with $7.2 billion being SASB loans. Borrowers will be looking to refinance, but securing debt might be challenging depending on the terms and health of the properties. Encouragingly, nearly 50% of the maturing SASB office loans boast strong debt yields (greater than 8%) and stable occupancy rates with limited near-term lease rollover. This is a considerable improvement compared to the 18% of conduit office loans maturing in the next year, making it easier for SASB borrowers to secure financing and pay off their loans on time.
Cautionary Tales and Nuanced Outcomes
However, it's essential to note that each situation is unique and fluid, as illustrated by the recent extension of the loan secured by the Bloomberg Headquarters at 731 Lexington Ave in New York. Despite a strong debt yield of over 14%, full occupancy, and limited lease rollover, the $500 million loan failed to pay off at maturity in June. The primary reason was the 2029 lease maturity of Bloomberg LP, which occupies 99% of the building. With Bloomberg recently extending their lease through 2040, the loan is expected to be refinanced soon.
Since early 2023, only two matured SASB loans have failed to pay off or secure an extension, indicating a trend where high-quality office properties with good debt yield and stable occupancy continue to perform well. For those not performing as well, a mix of defaults and workouts is expected, with larger assets likely receiving "extend-and-pretend" treatments, reminiscent of the post-2008 financial crisis period.
Summary
As we navigate the complexities of the commercial real estate market, the upcoming SASB office loan maturities offer a mixed yet hopeful outlook. High-quality properties with solid financial metrics are poised to perform well, while others may face more nuanced and unpredictable outcomes. In this dynamic environment, understanding the specifics of each loan and property will be crucial for stakeholders to make informed decisions and navigate through the challenges ahead.
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