Average debt service coverage ratios for loans originated during 2013 were on par with 2005 levels, but remained well above those seen in 2007, according to the latest research from CBRE Group, Inc. Additionally, average loan-to-value ratios hovered around 65% for 2013 loans, significantly below the 70%-plus levels seen in 2005 and 2007.
With the reemergence of pro forma income underwriting as well as lower debt service coverage and higher loan-to-value ratios in some recently issued commercial loans, some lenders and investors are asking: Have loan originations standards become too aggressive? In the report, How Did 2013 Loan Originations Stack Up?, CBRE Research compared recent underwriting standards during 2013 to those seen during similar timeframes in 2005 and 2007—periods characterized by aggressive loan underwriting.
“Analysts and investors are rightly concerned about refinance risk given the low interest rate environment, as well as the rise in partial and full interest-only terms in some recently issued loans,” said Mark Gallagher, Senior Strategist, Americas Research, CBRE. “However, our analysis found that 2013 originations compared favorably with 2005 and 2007 loans in terms of refinance risk. Fewer 2013 loans had a low stressed debt service coverage ratio or a high stressed loan-to-value ratio compared to the earlier periods.”
Other highlights of the report include:
- Loans that were aggressively underwritten—those with low debt service coverage and high loan-to-value ratios—comprised a relatively low percentage of loans originated during 2013.
- Only a small percentage of 2013 loans will likely face refinance difficulty, as many risk-averse institutions seemed to uphold relatively high debt yield requirements.
- Many 2013 loans were originated at a point when rents and occupancies were at or near cyclical lows. Generally speaking, the performance of properties backing these loans would be expected to improve as market fundamentals recover.
- Loans backing properties in markets where cap rates were near record lows and where property values have surpassed pre-recession peaks may face increased refinance risk, as increased construction activity in these locations could inhibit rent growth.
CBRE used a sample of over 1,400 permanent, fixed-rate first mortgages, accounting for over $24 billion in principal to conduct the analysis. The loans were backed by major commercial property types including offices, retail centers, industrial, multifamily and hotel properties. The loans were originated by a wide spectrum of lenders, including banks, life insurers, government-sponsored agencies and CMBS issuers.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.