It’s no secret that CMBS issuance has dropped this year, but what’s harder to know is what exactly happens to CMBS loans after they’ve been refinanced. How much money goes back into the conduit/fusion CMBS pool and how much waves goodbye to public securitization and heads on over to balance-sheet universe?
We answered these questions by taking a magnifying glass to New York City lending and examining a sample of $8.25 billion in 2015-2016 financings of NYC commercial properties that had loans that were at least partly securitized in SEC-registered conduit/fusion deals in 2005-2007.
Of that $8.25 billion, the vast majority – 81.2%, or $6.7 billion – was refinanced as balance-sheet loans or private securitization. The remaining 18.8%, or $1.55 billion, went back into public conduit/fusion CMBS deals.
As an example of a CMBS loan that went back into the CMBS world when it was refinanced, let’s take a look at 5 Penn Plaza, a tower with office tenants including Amnesty International and Continuity Software, and retail space on the bottom.
This 24-story building, located across from Penn Station and Madison Square Garden, was renovated last year, nearly a century after it was built. It was financed in 2007 by a $203 million loan originated by JP Morgan and securitized in a CMBS deal.
The loan was refinanced in January, about a year and a half early, and put back into four CMBS deals. Citigroup and Barclays originated $260 million in refinancing and the loan was split into three Citigroup CMBS deals and one JP Morgan deal. The 5 Penn Plaza loan is one of the top 10 in all four deals, and was issued at an interest rate of 4.85%.
Who is doing the refinancing?
The vast majority – 87% – of the CMBS loans in our sample that become balance-sheet loans or end up going into a private securitization are refinanced by banks.
Insurance Insurance companies such as Metropolitan Life Insurance Company, Prudential and American General Life Insurance come in at a clear but distant second, handling 12% of these refinancings. Other non-bank lenders include credit unions, foundations and asset managers.
One NYC property that was securitized in the early 2000s and refinanced as a non-conduit/fusion loan by a bank is 888 7th Ave., a 45-story office tower that is owned by Vornado Realty Trust and serves as its headquarters.
The The 7th Avenue building, near Carnegie Hall and Central Park, was financed in 2005 by a $318.5 million loan that went into three CMBS deals, LB-UBS Commercial Mortgage Trust 2006-C1, 2006-C3 and 2006-C4. The loan was refinanced by Bank of America for $375 million last year.
For an insurance company refinancing, take 1675 Broadway in midtown Manhattan, a 35-story mixed-use Rudin Management building on Broadway and 52nd Street that was refinanced by MetLife last year.
Tenants include media and advertising giants Starcom Mediavest and Publicis Groupe, which last year reportedly extended its lease until 2031 and added another 100,000 square feet to the 480,000 it already occupies.
In 2006 the property was financed by a $180 million loan originated by Prudential, $155 million of which was assigned to a CMBS deal.
Last year, the loan exited the public CMBS universe (for now) when it was refinanced by MetLife, which issued a $254.6 million balance-sheet loan.
Our findings indicate that the vast majority of commercial mortgage-backed securities financing does not go back into the conduit/fusion pool when its time in a securitized deal comes to an end. Rather, most of the money enters the balance-sheet world or private deals when loans are refinanced, primarily by banks or insurance companies.
Among commercial mortgages, public CMBS deals offer the greatest degree of transparency, making it easiest to get information on this subset of CRE loans. But knowing about those deals is not enough.
Securitized loans are only a small portion of all commercial real estate loans, and if we want to understand the big picture, we need to clear the fog and look not just at the CMBS world but also at where CMBS loans go when they get refinanced.