Oliver Munday

Five years ago, the CMBS industry was on the cusp of a peak year. In 2007, nearly $230 billion in commercial mortgage-backed securities was issued as the commercial real estate markets soared. But the day of reckoning is expected to come this year—a slew of five-year balloon loans made at the height of the market will soon start coming due. In its December report, New York–based CMBS monitoring agency Trepp noted that while many asset classes, including multifamily, saw a drop in 30-day delinquency numbers in November, this amounts to “the calm before the storm.”

“We’ve all seen the charts regarding maturities scheduled between now and 2017—it’s like a hockey stick,” says Kevin Smith, who leads the Alternative Capital Division of New York–based Centerline Capital Group. “There’s going to be a huge gap between where deals are going to be underwritten today and the equity that’s provided.”

The 2007 vintage of CMBS loans was the sourest in terms of underwriting standards, and about $15.5 billion worth of those will mature this year, says Trepp. About 27 percent of the five-year CMBS loans issued in 2007 are already in special servicing, and Trepp expects the majority of what remains to also wind up there eventually. Originally, there were about $20 billion worth of these 2007-era loans, but about 25 percent of them have already been extended or resolved with losses.

By historical standards, 2006 was no beauty either. About $13.7 billion in five-year CMBS loans matured last year, and only about 28 percent of them were retired. That means there are still about $9.9 billion worth of those loans remaining, the majority of which (60 percent) are in special servicing.

Of course, after this year, longer-term 2007-vintage CMBS loans are set to mature, leaving many owners to restructure, recapitalize, and rebuild the capital stack. The question is, will there be enough capital in the market to plug those refinancing gaps?

“I think that’s the big question,” says Bill Hughes, managing director of Encino, Calif.–based Marcus & Millichap Capital Corp. “We need more of that defensive capital out there and the ability to recapitalize transactions. We’ve got clients that are already talking with their special servicers about trying to extend.”

Ironically, Hughes sees this wave of maturing debt as a chance for conduit lenders to win more multifamily deals. “I could see the CMBS marketplace coming back, which would help some of that maturing debt,” he says. “Borrowers are really going to the CMBS marketplace now as a lender of last resort, and I think that really opens up a certain amount of opportunity for the CMBS guys.”