Commercial mortgage bond shortfall may cause hardship

Florida commercial real estate developers and investors have benefited from a general positive trend in both prices and occupancy rates. However, there have been some issues that create cause for concern. Specifically, investor expectations have become somewhat outsized, and rates on commercial mortgage bonds have not kept pace. This is causing investors to seek other ventures and leave a sizable gap in the possibilities for commercial financing.

The approximate $3 trillion worth of mortgages on commercial property are mostly issued by commercial mortgage backed securities, insurance companies and large banks. Most commercial mortgage backed securities are financed for a period of 10 years. After that time expires, they must be refinanced by the owner. Large numbers of the CMBS were issued about 10 years ago, at the height of the real estate boom, and now many real estate owners are having trouble finding lenders for refinancing.

The majority of commercial real estate bond borrowers are in secondary and tertiary markets. Strip malls and office parks are excellent examples of properties that might have their mortgage financed by a CMBS. With these bonds rapidly coming due and a virtual freeze in the market, more than one property in five out of these may find trouble financing in the next two years.

Lack of available financing leaves the property owners in a precarious position. They may address the issue through the sale of assets or other methods, but if they fail to do so, then foreclosure is a possibility. It may be helpful to meet with an commercial real estate attorney and discuss the options that may be available.

Source: CNBC, “Real estate’s ticking bomb: Who gets hurt”, Diana Olick, March 10, 2016