Commercial real estate had a banner year in 2015. The fundamentals of high demand and low vacancies are still driving rents higher.

There is, however, a catch that could cool the market quickly, at least when it comes to financing. Investors are insisting on high yield, and with bonds backing commercial mortgages not giving them results. In turn, investors are moving on to other products, leaving a big crack in commercial financing.

Backed by nearly $3 trillion in mortgages commercial real estate includes apartments, shopping malls, offices, and warehouses. According to the Mortgage Bankers Association (MBA). The lenders include big banks, insurance companies, and commercial mortgage backed securities (CMBS). That last one is where the problem lies. It is the second-largest source of commercial real estate debt, and back in 2005, CMBS was very popular.

“I think cracks a little bit of an understatement for where the market has been for January and February, where, for all practical purposes, the market was frozen,” said Willy Walker, chairman and CEO of Walker & Dunlop, a real estate finance firm.

CMBS tends to have a 10-year life span. At ten years, the debt matures and real estate owners have to refinance the loans. CMBS maturities are expected to surpass $400 billion this year. That is $100 billion more than last year. CBRE “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year could have problems refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially troubled loans over these two years.
“We think some of these are going to be remonetized through asset sales, but some will certainly hit the foreclosure list and end up on the special services list of loans to be worked out,” said Brian Stoffers, who oversees the debt and structured finance practice at CBRE.

Commercial Real Estate Not Cooling Down

Stoffers doesn’t see commercial real estate overall cooling at this point. A large influx of foreign capital continues coming in and the U.S. still considered a safe haven for investment. If the financing situation, however, worsens, even just in CMBS, it could spread to other investors and weaken appetites for real estate.
“The real refinancing wave doesn’t kick in until June, but starting in June there’s about $10 billion a month that needs to be refinanced, so unless the CMBS market finds its level and starts to price and transact again, we’re going to have more than cracks,” said Walker.