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CMBS-Linked Loans Worth $23 Billion Are Gripped by Paralysis Thinking
Putting it all together
More
than $23 billion in delinquent commercial mortgage loans bundled into
bonds (CMBS) are facing a state of "suspended animation" as borrowers
are unable or unwilling to repay or refinance, according to data
analytics firm Trepp
. This paralysis stems from a combination of factors:
- Maturity Walls and Refinancing Challenges: Many of these loans, originated at low interest rates, are now maturing in a dramatically higher interest rate environment, making refinancing difficult and expensive.
- Declining Property Values: Post-pandemic shifts, like remote work, have reduced demand for office spaces and some retail properties, leading to declines in property values, making it harder to secure new financing at favorable terms.
- Borrower Hesitation and "Extend and Pretend": Some borrowers are choosing to neither refinance nor repay, essentially treading water, possibly waiting for potential interest rate cuts from the Federal Reserve, according to Bloomberg.
This situation has led to:
- Growing Delinquencies: Unresolved loans now account for three-quarters of all delinquent CMBS loans, up from 42% in early 2022.
- Bottlenecks in Capital Flow: This inability to resolve loans creates blockages in the normal flow of capital within the commercial real estate market, says Rachel Szymanski, Trepp's chief economist.
- Distress Levels Approaching Financial Crisis Levels
Prognosis
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