Improved Liquidity and Rising Property Values Spur Defeasance

April 9, 2014

A highly competitive CMBS loan origination market, continuing borrower concern over rising rates, and a large proportion of outstanding loans nearing maturity provide conditions that are ripe for defeasance activity this year to exceed 2013 levels. Here’s a snapshot of the data:

+ Defeasance of CMBS loans increased 123% to $13.2 billion from $5.9 billion in 2012.

+ The largest shares of defeased loans, by property type, were retail, 33%, office, 25%, and multifamily, 24%.

+ The 10 largest defeased loans accounted for $3.0 billion, or 23% of defeasance in 2013. Five of the largest defeased loans were originally secured by retail properties, while the remainder were originally secured by office (3), industrial and mixed use.

+ Over three-quarters of the loans that defeased in 2013 were originated between 2004 and 2006.

+ In 2013, borrowers defeased loans with longer remaining terms than in 2012. By aggregate balance, 56% of loans that defeased in 2013 had remaining terms of one to two years, up from 39% in 2012. In contrast, 23% of the loans that defeased in 2013 had a remaining term of one year or less, down from 38% in 2012.

+ Principal and interest (P&I) classes that are fully covered by defeasance may not necessarily be rated Aaa(sf) because of concerns about interest shortfalls or realized losses.

According to Moodys Investor Service