Today’s depressed real estate values and tight credit markets have created a perfect storm, preventing commercial property owners from refinancing their debt as it matures. Yet, the mass of foreclosures that many feared has not yet occurred and the so-called “Great Wall of Maturities” has not come crashing down, as many have predicted. The Wall is supported, for the time being, by the lenders’ policy of “extend and pretend.” Property owners and lenders share the hope that real estate values and credit markets will change, permitting refinancing and preventing the massive transfer of distressed assets.
The Wall of Maturities is staggering; by some estimates $1.1 trillion in commercial real estate loans are set to become due through 2015. The peak year for maturities is expected to be 2013, when $311.8 billion will become due. Maturities will decrease to $286.5 billion in 2014, and continue to subside. Much of that debt was originated at the peak of the past market cycle. It is not surprising that lenders continue to extend and pretend, given the number of troubled loans and how far underwater they are. If lenders chose to foreclose, the losses could significantly erode, and in many cases totally eliminate, lenders’ capital—leaving many insolvent.
As vacancy rates increase and rents and property values continue to decline, lenders fear the risk of a default at the loan’s maturity and the risk that borrowers will be unable to continue to pay monthly debt service payments. This would end the policy of extend and pretend. Property owners face an equity gap because property values have plummeted and banks have toughened underwriting standards, no longer lending at pre-bubble loan-to-value ratios. Will this result in the borrowers’ inability to renew or refinance and result in more commercial loan defaults? Will this trigger a double dip recession?
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