CMBS SASB Market Braces for $62B in Loan Maturities: Report
By Andrew Coen May 13, 2024 12:16 pm
reprints
The pipeline of floating-rate, single-asset single-borrower (SASB) commercial mortgage-backed securities (CMBS) loan maturities is rising, and so are the likely defaults, new data from Morningstar shows.
This year will see $26.7 billion of SASB loans reach final maturity by the end of December with the number rising to $35.4 billion at the close of 2025, according to a Morningstar report released Thursday. The payoff rate of SASB loans fell to 63 percent last year, and Morningstar projects this rate to trend further downward in 2024 and 2024 if interest rates remain elevated.
“The fact that we’re seeing these default rates is pretty alarming, and a lot of times these are trophy properties in these SASB transactions,” said Rachel Sill, Morningstar’s senior vice president, for North American real estate ratings. “These SASB loans are underperforming at a historic level.”
Sill noted that the SASB CMBS market started to take off on the heels of the 2008 Global Financial Crisis due to investor demand for the size of these loans coupled with their floating interest rate capabilities as opposed to conduit deals, which are largely fixed-rate. Around 70 percent of SASB loans are floating-rate, typically with an original two-year term and three 12-month extension options that require certain hurdles to be met, according to Sill.
The vast majority of the 2024 and 2025 SASB maturities are concentrated in the office and hospitality sectors. The office sector SASB maturity balance grows to $14 billion in 2025, and Morningstar predicts that 23 percent of these maturing will default. For hotel loans, the 2025 default forecast is $6.5 billion, which would comprise 19 percent of the SASB debt scheduled to mature next year.
The projections for defaults could improve if the Federal Reserve starts to lower interest rates soon, but Sill stressed that a number of SASB loans tied to transitional properties will remain at risk even without lower interest rates due to unhealthy debt service coverage ratios. Even properties with solid cash flows and favorable loan metrics will see some borrowers needing to work with special servicers on modifications under a higher-for-longer interest rate scenario, according to Sill.
Multifamily properties comprise less than 9 percent of maturing loans in 2024 and 2025, but 95 percent of these transactions contain risk factors,she said.
One prime example of this is a $1.5 billion CMBS loan backing 3,165 units of the 3,221-unit Parkmerced apartment complex in San Francisco maturing in December, which Sill noted has been hampered by the city’s low physical office occupancy since the onset of the COVID-19 pandemic. The property’s occupancy was 94 percent when the loan was underwritten but tumbled to 55 percent in June 2022 before rebounding back to 81 percent as of September 2023. The loan’s DSCR is only 0.51 times.
Sill said San Francisco’s office market has been hit harder than other peer cities due to having a heavy concentration of tech companies that have embraced remote work more than industries like financial services, coupled with increased crime that has hurt multifamily demand. Additionally, data from the U.S. Postal Service shows a net population loss for San Fransisco of 55,000 since March 2020.
“A lot of people that worked in the city also lived in the city, and now when you have work from home you don’t need to,” Sill said. “You didn’t expect a market like San Francisco to be hit with something like this.”
Andrew Coen can be reached at acoen@commercialobserver.com.
