Maturing Mortgages Spell Trouble

BIRMINGHAM, AL - The principal amount on $1.6 billion in commercial real estate loans is coming due in Birmingham over the next three years, and experts are predicting problems for lenders and borrowers as occupancy, rents and property values continue to fall.

The recently released data from Foresight Analytics LLC is more troubling news for a weakened commercial real estate sector. Rising unemployment and a sour economy have left more empty spaces on the market and many landlords are unable to assume that rents will rise on income-producing properties.

What borrowers, even those with performing loans, are left with is a shortfall between where properties are valued today and the principal amount that's due on loans made during the height of property values, similar to what's happening in the housing market.

The result: a possible increase in distressed commercial property over the next few years.

But lenders say they're being proactive in reviewing loans coming due, and granting extensions in most cases, and borrowers say they're closely monitoring the situation that seems to have no good answers.

Locally, Foresight Analytics estimates $1.6 billion in commercial and multifamily mortgages will mature in the Birmingham area between 2009 and 2011 and $5.8 billion in Alabama.

That's only a slice of the whole pie since that figure is for loans made by banks and thrifts and represents only 50 to 60 percent of the market, said the research firm. It doesn't include commercial mortgage backed securities, life insurance companies and other financing vehicles that made loans coming due.

Nationally, in a recent report on mortgage maturities, Foresight estimates $814 billion in commercial and multifamily loans will come due between 2009 and 2011. Nearly $454 billion of that is from banks, while $147.9 billion is from CMBS and $212.2 billion is from life companies and other financing arms.

The report said the commercial and multifamily mortgage market more than doubled between 2000 and 2007 – with the most rapid growth occurring in 2005, 2006 and 2007 – adding $1.8 trillion in new debt.

Typically, banks provide short-term loans of about three to five years, while CMBS, life companies, pension funds and others provide permanent financing on a 10-year term, making 2010 pivotal.

The rising demand for financing and tight credit could spell out increased distress in the debt market and further pressure on values, said the report.

In February, the Moody's REAL Commercial Property Price Index hit 150.63. That's down more than 21 percent from the same month a year ago, down 21.5 percent from its peak in October 2007 and down nearly 18 percent from two years ago.

Sources say banks are already granting typically one-year extensions on maturing commercial loans, but most say that's delaying the inevitable and creating a larger bubble of loans coming due in 2010.

And the extended and refinanced deals are eating up new allocations for funding in most institutions – funding that could infuse fresh capital into the market, said Dave Roberts, president and COO of Grandbridge Real Estate Capital LLC in Birmingham.

"We've seen values erode pretty significantly with concerns in retail and office and with credit-quality questions of some tenants and rising cap rates," he said. "We haven't seen the bubble this year, but the book of business in the height of the market, that's going to be an issue. There's not enough equity in those deals today, despite the fact they keep performing."

Roberts said the financial industry is urged to be proactive and review loans now, so it can garner a better picture of how much equity is needed to fill these gaps. Recently, he said, his company formed an internal group to do just that and Fannie Mae and Freddie Mac have asked for a detailed analysis of every loan through them that matures within 24 months.

And borrowers have to be proactive, too, and not wait until the last minute, he said.

"Borrowers need to be honest and get there before they mature to talk about the issues and bring solutions to the table," he said.

Engel Realty's Steve Butler said his company's portfolio has very few mortgages coming due in the next few years. But it's a situation he's monitoring closely.

"I was talking to a lender recently, talking about a loan coming up in the next 24 months and the lender said, 'That's a millennium,'" said Butler. "The lenders don't have an answer. They're dealing with other things."

Butler said the CMBS market is the real unknown in all of this, as that market has died and there's no entity to revive it – unlike the multifamily market, which has Fannie Mae and Freddie Mac to facilitate loans.

With too few answers other than extensions and little money for capital improvements to borrower's assets, an increasing number of distressed and encumbered properties are likely to hit the market, said Bob Loftin of Elyton Solutions, a local real estate investment consulting firm.

"Foreclosure is not the best option," he said. "No one wins and at some point they're not going to be able to get a seat in the courtroom because there's not enough space."

So is government intervention needed?

Engel's Butler said it's the government or else a tremendous amount of foreclosures and further depression in prices. "The (Resolution Trust Corp.) came about through the thrift problem (in the 1990s) and it was a great solution."

The government already has expanded its Term Asset-Backed Securities Loan Facility to include CMBS deals, which Foresight Analytics partner Matthew Anderson sees as a moderate step toward reinvigorating the market.

But Loftin said more government money thrown into the mix is a Band-Aid and delays the reality and correction of asset values. "The government is providing money to protect the status quo and the status quo is what's causing the problem," he said.