Percentage of CMBS Loans Paying at Maturity Remains High

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Of all the CMBS loans that reached their maturity dates in October, 60.7% (by balance) were paid off, according to a Trepp report on October payoffs. While this figure is more than seven points below the September reading of 68.2%--which was the highest payoff level since December 2008-- considering that the payoff level has only surpassed the 60% mark three times before October (since the beginning of the recession), this number is a milestone.

In August, Trepp predicted that the CMBS loan payoff rate would probably rise in the coming months. For the remainder of the year, according to Trepp, loans maturing would be more heavily represented among earlier vintages (rather than 2006 and 2007). Because loans from those periods "were made with lower leverage and more reasonable valuations," there would be better payoff numbers in the coming months, according to Trepp. But the results from September and October surpassed expectations, the October report noted.

Along with the good news, the October Trepp report suggested that investors should be particularly careful in the trading of interest-only (IO) loans. In spite of the concern about interest-only loans in the past,   spreads for them have dropped dramatically over the last few years, based on the expectation that many of them would be extended when they reached their maturity dates, said the Trepp report.

Although the makeup of the underlying loans in a CMBS pool is certainly important, according to the Trepp October report, and loans from 2004 will have a better chance of being paid off on time than those from 2007, it nevertheless suggested that renewed confidence in the CMBS market should make investors reevaluate the CMBS market. With new CMBS spreads at their tightest levels in four years, and with US treasuries at near historic lows, more loans should be refinanceable now than anytime since 2008.     

The October reading of 60.7% was more than 16 points above the 12-month average of 44.3%, a number derived by adding up the averages for each month and dividing by 12. By loan count, as opposed to balance, 59.7% of CMBS loans paid off in October. On the same basis, the 12-month rolling average is now 54.1%.

Before 2008, monthly pay-off percentages were typically well over 70%, according to Trepp. But since the beginning of 2009, there have only been six months in which more than half of the balance of loans reaching their balloon dates were paid off.