Retail property owners in South Florida will face a series of financing decisions in the next few years, as billions of dollars of commercial mortgage-backed securities debt comes due.
CMBS are debt instruments in which pools of real estate loans are bundled together and sold to investors, with the funding going toward construction, acquisitions and refinancing.
At the height of last decade’s real estate frenzy from 2005 and 2007, about $600 billion of CMBS loans were issued nationally, with $33 billion issued in Florida, including $13 billion in South Florida, according to data supplied by Trepp LLC.
A substantial number of the loans in these pools had 10-year terms, and are scheduled to mature between 2015 and 2017. Overall, about $357 billion will mature during the next three years nationwide, including $7 billion maturing in South Florida.
Most CMBS loans come with a prepayment penalty, which usually keeps borrowers from taking any action until close to the time the loan is due. But between now and 2017, borrowers who have loans pooled in these CMBS will have to decide whether to refinance their properties or pay down their debt.
David Moret, principal of Continental Real Estate Companies., explained that South Florida has a variety of classes of CMBS debt backing retail properties. These include properties that have seen values rise, which are likely locks to secure refinancing; debt that is barely above water and does not have enough equity for a refinancing, and loans that are underwater and would likely require a restructuring or another kind of workout.
While Moret expects only “pockets of distressed transaction volume,” banks must be ready to address those loans. “Lenders must figure out how to deal with borrower requests for a workout,” he said.
If shopping center owners can keep occupancy rates high, new lenders could enter South Florida to seek out CMBS borrowers with maturing debt, according to Jason Shapiro, managing director of Aztec Group, a real estate investment banking firm. Some borrowers will need bailouts, but the overall South Florida real estate market is thriving, he added.
Miami-Dade County’s retail vacancy rate reached an all-time low of 3.9 percent during the second quarter of 2014, according to CBRE. Broward County’s retail vacancy rate had a year-over-year drop to 7.8 percent in the second quarter, from 8.2 percent last year. Palm Beach County’s rate declined to 7.7 percent from 8 percent during that span.
On the negative side, Shapiro noted some CMBS deals made before the crash look bad now. That’s because as with the residential mortgage market, lenders were willing to hand out cash to borrowers with weaker financial backing, due to looser underwriting standards.
“Some loans in default are really in default more as a function of when they were made, rather than the type of property, location or size of the loan,” said Bilzin Sumberg partner Scott Baena. He predicted a difficult process ahead for those borrowers who face fewer financing options.
A continued rise in property values between now and 2017 could alleviate one problem —credit may become more widely available. That could allow some owners of now-distressed assets to refinance.
“I’m cautiously optimistic,” Baena said. “It is not as horrific as I thought it would be.”
The direction of interest rates is also going to be a key factor. David Podein of Miami-based law firm David B. Haber said future deals will hinge on whether rates go higher.
At the moment, low interest rates make it easier to refinance. “But if rates rise between now and 2017, that would make it more expensive and harder to do,” Podein said.
One sure bet is that financing won’t be flowing as freely as it did a decade ago. “Everybody must be more realistic,” Baena said. “No more pretending in an irrational marketplace. We must control the marketplace — not let it control us.”