Debt maturities by property type?
Breaking down 2023 conduit maturities by property type, retail has the highest concentration with 42% of outstanding debt and is followed by office with 22%. Lodging has the third-highest concentration with 14% of the outstanding balance of maturities in 2023.
Commercial-debt maturities are expected to continue rising, with more than $2.2 trillion coming due between now and the end of 2027, Trepp said. Most of these loans have so far been repaid or extended. In 2022 and 2023, many owners were able to exercise one- or two-year extensions built into their original loans.
While each lender sets different targets for the debt yield, the standard range among commercial real estate lenders (CMBS) is from around 8% to 12%.
As the largest commercial mortgage holders, banks and thrifts hold half of the loans maturing between 2023 to 2027, inclusive. Trepp compiles its mortgage data from the Federal Reserve's flow of funds, also referred to as the Z.
Fitch forecasts U.S. CMBS office loan delinquencies to jump to 8.1% in 2024 and 9.9% in 2025 and for U.S. CMBS multifamily loan delinquencies to increase from 0.62% in November 2023 to 1.3% in 2024 and 1.5% in 2025.
Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan.
Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
It is calculated by dividing the net operating income (NOI) of a property by the total loan amount. A higher debt yield indicates a higher potential return on investment for the lender. The widely utilized industry standard for minimum acceptable debt yield is 10%.
What is a debt coverage ratio in commercial real estate? Debt Coverage Ratio (DCR) is a measure of a property's ability to generate enough income to cover its debt obligations. It is calculated by dividing the net operating income (NOI) of a property by its total debt service (principal and interest payments).
The Debt Yield is similar to the DSCR but is expressed as a percentage rather than a ratio. This metric is calculated by dividing the property's NOI by the loan amount. The Debt Yield measures the return a property generates on its debt investment.
How much commercial real estate debt is floating rate?
In contrast, as cited in the Wall Street Journal, the Mortgage Bankers Association reports that almost half of all commercial property debt is floating rate debt.
Rising default rates on commercial real estate loans
The new normal of hybrid work has hit the commercial real estate sector particularly hard. Demand for office space keeps plummeting, and vacancy rates reached about 20% in the third quarter.
Bad debt is a negative income line item that occurs when a payment can no longer be collected because the client, or tenant, is unable to fulfill their obligation due to financial difficulties. Bad debt is an unfortunate cost of doing business and is a risk inherent when working with any customers.
Refinancing Cliff: The commercial real estate market is facing a significant refinancing challenge in the coming years. Many commercial mortgages are due for refinancing, and with higher interest rates and increased vacancies, property owners may struggle to secure favorable refinancing terms.
Rates in 2024 are expected to “moderate toward a more normal level,” with 30-year fixed averages dropping below 6% by the end of the year, according to a revised outlook published by Fannie Mae's Economic & Strategic Research group on Thursday.
As a result, the amount of each payment that goes toward the principal gradually increases while the amount going toward interest decreases. For commercial real estate loans, amortization typically occurs over a span of 25 years at most. The specific term, however, will vary depending on the loan agreement.
In the final step, the real estate investment payback period can be estimated by dividing the property value by the annual return, which implies that the time required by the commercial property to reach its break-even point and start generating a profit is approximately 8 years.
Three of the most common types of commercial loans are lines of credit, term loans, and commercial mortgages.
Lenders look at DTI when deciding whether or not to extend credit to a potential borrower, and at what rates. A good DTI is considered to be below 36%, and anything above 43% may preclude you from getting a loan.
Most conventional loans allow for a DTI of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months' worth of housing expenses.
How did Dave Ramsey get into real estate?
You don't need money.” So, Dave started his first business, Dave's Lawns, and got to work mowing lawns in his neighborhood. That entrepreneurial spirit carried him all the way through high school, when he passed the real estate exam right after graduating. He got his Graduate, Realtor Institute designation at 19.
Real estate debt typically takes the form of a mortgage or deed of trust. The debt instrument is often a real estate debt fund, which a private equity firm creates. The collateral (real estate property) is considered securitized. In the debt structure, the securitized property is a senior real estate asset.
As a general rule, however, a DSCR above 1.25 is often considered “strong,” whereas ratios below 1.00 could indicate that the company is facing financial difficulties.
Key Takeaways. A solvency ratio examines a firm's ability to meet its long-term debts and obligations. The main solvency ratios include the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio.
Debt Yield Example
The debt yield ratio is calculated by dividing a property's Net Operating Income (NOI) by the total loan amount. Consider a commercial real estate property with an NOI of $1,000,000 and a loan of $10 million. The debt yield in this case would be 10%, as the NOI is 10% of the loan amount.
