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Landlords Face a $1.5 Trillion Bill for Interest Only Commercial Mortgages

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40 comments on Landlords Face a $1.5 Trillion Bill for Interest Only Commercial Mortgages

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Share of Interest Only Commercial Mortgage Backed Securities 

Commercial Real Estate Bust

A trend to walking away from commercial mortgages is just beginning. The Wall Street Journal reports Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due.

Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp. Nearly $1.5 trillion in commercial mortgages are coming due over the next three years.

Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners. 

Mark Edelstein, chair of law firm Morrison Foerster’s global real-estate group, said he is seeing more lenders take over office buildings than at any point since the early 1990s. 

Oblivious to Risks

Lenders and  borrowers had widespread belief in two things, both now proven false.

  • Interest rates would stay low forever
  • Property values, already clearly in a bubble, would keep rising forever

Now a $1.5 trillion  bill is coming due, with property values, especially office space and some big city hotels, plunging like a rock.

83 Percent on Securitized Office Loans in Trouble

Xiaojing Li, managing director at data company CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels.

The 1,921 Room Hilton Union Square Hotel in San Francisco Was Just Abandoned

Yesterday, I noted The 1,921 Room Hilton Union Square Hotel in San Francisco Was Just Abandoned

Park Hotels & Resorts also walked away on the nearby 1,024-room Parc 55. Park Hotels & Resorts cited the continued debt burden of the two hotels and multiple factors that have made the San Francisco market less desirable.

Well, don’t worry. Lenders who are handed back the keys can recoup their losses if they borrow money and plow it all into Nvdia and Apple with leverage. /sarcasm

This post originated on MishTalk.Com.

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RonJ
RonJ
10 months ago
“Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88%…”
Is this an example of financialization to the Nth degreee?
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Bam_Man
Bam_Man
10 months ago
Interest-only loans typically have a balloon payment due within 5-10 years (at most).
Ruh-roh.
I hear a lot of keys jingling in envelopes.
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magoomba
magoomba
10 months ago
Never have so many deserved to lose so much!
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Tony Bennett
Tony Bennett
10 months ago
Well, even bullz realize commercial debt dead man walking … so, WHO will step to the plate to (re)finance?
Not many (any?) pro formas at inception penciled in current rates.
REITs (like Blackstone) are gating investors. Good luck there.
Banks? Regulators on the cusp of making them increase capital … while keeping an eye on deposit base. Doubt they’re in the mood.
As a price fixes everything advocate … I know what will work …
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MPO45v2
MPO45v2
10 months ago
Reply to  Tony Bennett
There will be a government bailout. Treasury is supposed to be buying back those low interest rate bonds in 2024 from what I understand to fix ‘liquidity issues’ but what it really means is a new bailout. People will whine and bellyache about it but the usual will happen, a few elite people will walk away with millions or billions and taxpayers will pick up the tab. Rinse & repeat at next cycle.
Any questions?
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Tony Bennett
Tony Bennett
10 months ago
Reply to  MPO45v2
“There will be a government bailout.”
…
Sure. But that won’t save many from taking steep losses.
Back in 2008 / 2009 … despite TARP / Federal Reserve buying mbs / smorgasbord of Treasury housing initiatives re housing (HAMP, HARP, etc) housing took a big hit…. and years to recover. Even Secretary of Treasury Geithner labeled it nothing more foaming the runway.
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MPO45v2
MPO45v2
10 months ago
Reply to  Tony Bennett
True, technically the losses have already happened but like you said, it’s dead debt walking.
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Six000mileyear
Six000mileyear
10 months ago
Reply to  Tony Bennett
Investors who are gated in Blackstone will sell the next most liquid asset they can.
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Matt3
Matt3
10 months ago
I understand the issue with office but for hotels and other properties, I just don’t see it. Hotel room rates are up 20%. Listened to Hyatt and Marriott and they both were extremely positive (much better than 2019) except for 3 markets – San Fran, Chicago and Seattle.
I would guess landlords have raised rents on apartments and retail and they will be still have positive cashflow.
As long as the property is cash flow positive and can handle the new interest rate, the owner won’t walk away. They will negotiate. The property still has value if it has positive cash flow. Someone will buy it.
The world isn’t ending.
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Tony Bennett
Tony Bennett
10 months ago
Reply to  Matt3
“I just don’t see it.”
…
I just don’t see it, yet.
FIFY. Manufacturing undergoing a “recession”. Services still holding up, well.
A lot of construction still underway … but as pipeline cleans out (due to high rates)? Put me down for construction job losses leading the way (when employment takes a hit), then services will take a hit.
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Mish
Mish
10 months ago
Reply to  Matt3
Companies took out an interest only loan at say 3%.
The loan is due to reset above 7% factoring in risk.
Cash flows do not support 7% interest rates.
Who wants to buy the building now?
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Matt3
Matt3
10 months ago
Reply to  Mish
I think with rents or room rates up, cash flows will support the debt. We will see.
For most businesses (reasonably leveraged), rates from 3% to 7% are not going to change much of anything.
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TexasTim65
TexasTim65
10 months ago
Reply to  Matt3
Interest rates going from 3 to 7 percent doubles your payments.
How many businesses do you think can afford a major expense doubling in cost (equivalent to 100% inflation)? Only a very few. Most will be crushed.
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Siliconguy
Siliconguy
10 months ago
Reply to  Matt3
The key word is “reasonably leveraged”. The brilliant financial plan for the last 20 years has been maximum leverage to goose profits.
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KidHorn
KidHorn
10 months ago
Reply to  Matt3
Builders were extremely confident in 2007.
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MPO45v2
MPO45v2
10 months ago

Lenders and borrowers had widespread belief in two things, both now proven false.

  • Interest rates would stay low forever
  • Property values, already clearly in a bubble, would keep rising forever
Speculative lenders and speculative borrowers had two beliefs:
1. The government will bail them out when things go bad
2. The taxpayer will take the losses
Bonus: Both speculators (executives) will walk away with millions.
Just wait and watch when the defaults start happening.
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Democritus
Democritus
10 months ago
Reply to  MPO45v2
And after that government/taxpayer bailout, some govt officials will warn that they should be the last ones. Because of the ‘moral hazard’ that nasty people would speculate on the next. The warnings will be given with frowning faces, as if they really feel the taxpayer’s pain. And then the cycle repeats, hahaha.
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Doug78
Doug78
10 months ago
Negotiating:
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TheCaptain
TheCaptain
10 months ago
Why does nobody except me seem to understand that the exponential chart of sovereign debt either inflates at an accelerating pace or it will collapse into a mania chart where there is zero credit and everything becomes a cash market? There is no third option. There is no long term work out. Something life changing will happen within 2-3 years for western markets and it won’t be good.
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TexasTim65
TexasTim65
10 months ago
Reply to  TheCaptain
We all understand it or at least we all should since Mish has espoused on this for as long as this blog has existed (15+ years).
Boom and bust cycles are normal and in fact a feature of capitalism. It’s how malinvestments in the economy get corrected. The real problem is when governments act to stop these normal cycles.
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Tony Bennett
Tony Bennett
10 months ago
Reply to  TexasTim65
“Boom and bust cycles are normal and in fact a feature of capitalism. It’s how malinvestments in the economy get corrected. The real problem is when governments act to stop these normal cycles.”
…
Bullseye. Well said.
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FDR
FDR
10 months ago
Reply to  Tony Bennett
No, the real problem is when plutocrats bribe kleptocrats to socialize the losses. Governments in the West have been bought and paid for by those whose agenda is more than just socialize their losses.
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worleyeoe
worleyeoe
10 months ago
Reply to  TheCaptain
I understand it! JPowell probably understands it but doesn’t talk about it. Rand Paul understands it. The GOP Freedom Caucus gets it. McCarthy doesn’t get it along with Biden who doesn’t get anything. The guy is literally falling all over himself now and has the FBI & DOJ providing cover.
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FDR
FDR
10 months ago
Reply to  worleyeoe
Biden has been a corporatist and a believer in the Deep State is whole political life as has Bush, Bush II, Obama and Trump. All of the above are just doing what they are told. But the biggest Manchurian Candidate by far was Ronald Wilson Reagan. Pull away that teleprompter and you got an addled former actor without a script.
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MPO45v2
MPO45v2
10 months ago
Reply to  TheCaptain
I heard the same nonsense in the 1980s and I’m sure it was said after nixon went off gold and probably a hundred times before that…
Hollywood tends to reflect society so here is a movie from 1981 to prove the point.
“The wife of a murdered petrochemical company chairman and a banker
investigating the liquidity of his new bank stumble upon an
international financial scheme that could lead to global economic
collapse.”
For some people, it’s always the end of the world…been that way for thousands of years in every culture around the world. Don’t worry, be happy and profit.
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Thetenyear
Thetenyear
10 months ago
So we have too much office space, too many hotel rooms (especially in SanFran), too much retail space (WMT non-grocery in store sales down 10% last quarter) and too many banks. Bank branches are finally starting to disappear but they are seemingly being replaced by automatic car washes. Pretty soon we will have too many car washes as well!
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Wizenwizard
Wizenwizard
10 months ago

Okay I have a dumb question but would appreciate an education:

independent of numerous derivatives there appear to be only 4 things traded on our markets:

1) equities

2) bonds

3) insurance contracts ( CDO)

4) commodities/currencies

is this correct?? Mainly in terms of “insurance contracts “.

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PreCambrian
PreCambrian
10 months ago
Reply to  Wizenwizard
5) Cryptocurrency
6) Government credits (tax credits, environmental credits, etc.)
7) I am sure there are others depending on your definition of “markets”, bonds, and equities. For example “supply chain finance” I guess would be under bonds. Dreams are also for sale.
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MPO45v2
MPO45v2
10 months ago
Reply to  Wizenwizard
What do you mean by markets? Virtually everything in existence from sand to space craft are “traded” somewhere for some purpose. A big one missing is real estate from your list.
Start here.
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Doug78
Doug78
10 months ago
Reply to  Wizenwizard
There are so many different instruments with acronyms in finance that it would make the LGBTQIA community blush with inadequacy.
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Call_Me
Call_Me
10 months ago
Reply to  Doug78
Surprised that comment escaped moderation — seems dangerously close to a micro-aggression.
Call_Me_Al
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Doug78
Doug78
10 months ago
Reply to  Call_Me
You can’t micro-aggress financial professionals. Their skins are tougher than a hippo’s.
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tomatohead
tomatohead
10 months ago
Reply to  Doug78
It has nothing to do with their skin. Financial professionals are hollow underneath.
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Doug78
Doug78
10 months ago
Reply to  tomatohead
Not really. Most are normal people and many have quite rich personal lives. Tough skin just means you stay calm under adverse conditions.
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Call_Me
Call_Me
10 months ago
Reply to  Doug78
Not picking on the financial hippos, I was referring to you implying a certain community has an inadequacy 🙂
Call_Me_Al
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Doug78
Doug78
10 months ago
My question is how long will it take for people and companies to adapt to the new normal which is real positive interest rates as far out as I see. Most are still in the fantasy expecting rates to go back down negative, They will give you a slew of reasons why we should see the Fed go back to what they had known before but it is just magical thinking.
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TexasTim65
TexasTim65
10 months ago
Reply to  Doug78
Probably about as long as it took them to believe in ‘zero interest rates forever’.
That suggests about 3-5 years time frame.
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skicolorado
skicolorado
10 months ago
Reply to  Doug78
As a professional investor, I’m not sure who it is that thinks we return to negative real rates. No one I deal with. Over time, we expect the 10 yr UST to settle out somewhere around 4.0-5.0% with short term rates somewhere around +/- 2.5-3.0%, but the timing of that hypothetical stabilized environment could be several years away. The general thought on the real interest rate is for it to return to a more normal 0.5% or as high as +1.0%
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Thetenyear
Thetenyear
10 months ago
Reply to  skicolorado
The market will have too come down a bunch if we see sustained rates at 4-5%. It’s already at record highs relative to the ten year.
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Doug78
Doug78
10 months ago
Reply to  skicolorado
Many professions believe as you do but many do not. Among the nonprofessionals a return to rates that will save their portfolios and house prices is still seen as a given. Almost everyone who would benefit from negative interest rates has a firm belief in its inherent virtue and expect a return to that policy as sane and good. I am happy that the Fed doesn’t seem to be of that ilk.
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