At least two-thirds of the $410 billion of U.S. commercial mortgage-backed securities (CMBS) loans that mature from this year through 2018 are not likely to qualify for refinancing, according to a report by Deutsche Bank.
The predictions get worse for loans made in 2007 -- the height of the commercial real estate bubble -- where 80 percent are unlikely to qualify, according to the report released on Thursday by Deutsche Bank debt researchers.
As CMBS loans make up only about 20 to 25 percent of the entire commercial real estate market, other sources of financing, such as insurance companies and banks, are likely to see similar or worse potential defaults, the report said.
From about 2005 through the first part of 2007, the U.S. commercial real estate industry experienced an expanding bubble where loans were made using very aggressive assumptions about future rent, occupancy and prices.
Many of those deals were financed using debt equal or surpassing up to 90 percent of the price paid. The liberal use of debt financing in turn fueled prices.
But the credit crisis burst the bubble, and since then prices have tumbled about 25 to 30 percent from their peak, according to the report. Prices could further fall, resulting in values declining 40 to 50 percent.
When those loans come due, borrowers likely will find fewer sources of debt financing, Deutsche Bank said. Available lenders will finance a lower percentage of property value and that value is almost sure to be less, leaving a gap of about $100 billion, Deutsche Bank estimated. Many borrowers will end up defaulting as investors will not pay more than what the property is worth.
Deutsche Bank conservatively estimates that CMBS default-related losses for fixed-rate CMBS is $50 billion, 6.5 percent of the total aggregate outstanding balance. The analysts estimate that maturity default-related losses will be at least 4.6 percent of the CMBS loans securitized in 2005; 5.8 percent for those in 2006 and a whopping 12.5 percent of those securitized in 2007.
(Reporting by Ilaina Jonas, editing by Matthew Lewis)