Analysts with Fitch Ratings analyzed outstanding conduit loans that will be maturing in YE 2023. The good news, according to their research, is that most of these loans will be able to refinance and avoid default. Numbers suggest that 65% to 68% of balances with a WAC of 4.70% will be able to refinance at 6.75% and avoid default. However, that suggests 23% or $6.2 billion of maturing volume would be unable to refinance under those scenarios and avoid default without at least a 1.5x NOI growth, or an infuse of private capital.
Although many of the technical indicators today suggest a soft landing, stabling prices, and even localized appreciation in 2023, if credit servicers are not willing to grant extensions or loan modifications to stabilized assets, a credit squeeze on $6.2 billion of outstanding balances could potentially dry up the credit market, further driving down demand for real estate assets.
So what does this all mean?
The jury is out on what this could do in the short term. Although intuition would suggest a steep downward pressure on all real estate classes, if 2022 has taught us anything, this may not be the case.
Although the $6.2 billion figure is undoubtedly frightening, the figure does come in below the pandemic peak we saw in 2020-21, suggesting many investors are still positioned well. This could indicate that as these balances mature and slip into default, well-positioned investors may be waiting in the wings to collect on price points not seen in the last decade. This certainly has a near-term effect on equity and real estate prices. However, if the investor base in cash is prepared to capitalize, this may have a more stabilizing effect that could position the markets for a faster swing when rates are estimated to begin easing in 2024.
How are we positioning for this potential time bomb? Here at Above 8, we continue to service low-rate debt and remain under-leveraged in any deal we put together. We do this to continue to position equity leverage that will enable us to deploy when over-leveraged investors begin to approach default and look for more accessible exits. Understanding this time bomb may never materialize, we continue to underwrite deals and pursue positions that make sense based on our risk profile. Timing a market is never a good business strategy. Therefore we will continue to buy in all market conditions conducting strict underwriting and submitting aggressive offers on properties in highly desired markets.
What do you think? Are we on the countdown to a ticking time bomb in the credit markets?
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