This not happening just in the commercial real estate sector, but across all the capital markets! The spreads are widening as the investors are demanding more to invest on those bonds.
As we all know, 2015 had been a great year for commercial real estate sector, where the low vacancies and high demand kept driving the rents higher and higher. However, there is a catch that could cool the market down when it comes to financing. With the aim of gaining more, the investors are looking for a high yield, whereas the bonds which are backing the commercial mortgages are not supporting that, because of which the investors are moving on to other products leaving a fissure in commercial financing.
Here are a few points that give you a brief insight of the problem:
According to Mortgage Bankers Association (MBA), the commercial real estate including shopping malls, apartments, office spaces and warehouses are backed by $3 trillion in mortgages. The lenders include big banks (the largest insurance companies) and the Commercial Mortgage Backed Securities (CBMS). CBMS tends to have a life span of 10 years; it’s the point at which the real estate owners will have to refinance the loans. It’s expected that, these maturities will surpass $400 billion in this year.
A popular real estate firm estimates that, 18% of the loans in this year and 29% of the loans in the next year might have this refinancing problem because of the lack of investor demand for the bonds. This comes up to about $43 billion, the loan amount that could be in trouble over these two years. The experts say that, these are going to be remonetized through asset sales; but some are sure to hit the force closure list and end up.
With large influx of foreign capital coming in, the commercial real estate doesn’t seem to be cooling at this point. If the financial situation worsens still more, the mortgage problem could spread up to other investors while weakening the appetite for real estate. But the real estate experts say that, the real refinancing wave doesn’t start until June, but after that there’s about $10 billion a month that has to be refinanced. So, unless the CBMS market starts to transact again, we are surely going to have more cracks.
This not happening just in the commercial real estate sector, but across all the capital markets! The spreads are widening as the investors are demanding more to invest on those bonds. With some of the pricing changes in CMBS and with a little less liquidity, lots of loans are coming due and there might arise a situation where there is very less availability of capital to refinance the loans, says the Vice President of MBA (Research And Economics group). So, higher the yields offered, more will be the investors.
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