A Weekly Look at the Commercial Mortgage-Backed Securities Business
The 740-unit Cortland Mirror Lake in Apopka, Florida, is the largest complex leading a new Freddie Mac offering. (CoStar)
CoStar News
June 6, 2024 | 7:23 AM
Blackstone Lands Apartment Refinancing: Blackstone Real Estate Income Trust and multifamily investor and operator Cortland have completed a $295 million refinance of 16 suburban apartment properties, according to a new commercial mortgage-backed securities offering from Freddie Mac.
Capital One originated the 10-year, interest-only and floating-rate loan, carrying an interest rate of 7.36%, last month. The debt represents the largest single loan Freddie Mac has securitized in the past two years, according to CoStar data.
Blackstone REIT and Cortland previously completed a recapitalization of the portfolio in 2020 just days before the declaration of the COVID-19 pandemic. Blackstone REIT acquired a 98% interest from Cortland at that time. The properties, then called the Acorn Multifamily Portfolio, contained 8,309 units and were 94% occupied.
Since 2020, the portfolio has been whittled down to 16 properties totaling 6,836 units with 93.4% occupied, according to Freddie Mac loan data. The portfolio was appraised at $1.68 billion.
The largest of the properties is the 740-unit Cortland Mirror Lake in Apopka, Florida.
Blackstone REIT declined to comment to CoStar News.
More Delinquencies, Defaults Expected: As financing challenges for commercial real estate borrowers grow, their difficulties are likely to spill over into the CMBS market, according to new analysis from bond rating firms.
So-called higher-for-longer interest rates are exerting pressure on property valuations by pushing capitalization rates up and lowering the amount of net income available to make monthly loan repayments.
S&P Global Ratings expects valuations to drop further in 2024, but they could stabilize if the Federal Reserve begins cutting borrowing rates later this year.
“Reduced valuations in the office sector have been much steeper than average for other property types given ongoing pressure from hybrid work and slowing job growth,” S&P said in a report. “A recovery could take years since we assume a further 2% to 3% drop in occupancy while net effective rent declines modestly as leasing activity remains weak.”
For CMBS loans, S&P expects overall delinquency and special servicing rates to rise for the balance of the year. Rating actions will likely remain negative for the most part as they have for the past two years.
Morningstar DBRS calculated there are more than $45 billion CMBS fixed-rate loans maturing each year through 2028, peaking at $66.6 billion in 2025.
“We estimate an overall payoff rate of 50% to 55% of CMBS fixed-rate loans in 2024,” the firm said. “With interest rates remaining high and inflation persisting, the payoff rate of maturing loans is expected to worsen, given the refinance challenges in the current macroeconomic environment. Unless borrowers are able to contribute more equity, we may see a significant number of defaults or loan modifications.”
A Busy Two Weeks: The last two weeks of May were the busiest in the CMBS market since 2022, according to Alan Todd, CMBS strategist for Bank of America Securities.
The surge of deals was the result of, among other factors, strong investor competition following the somewhat limited supply of deals last year.
The current pipeline of deals expected to come to market this month totals $13.5 billion. That would bring private-label issuance for the first half of the year to $50 billion, or 163% more than was priced during the first half of last year. In light of the activity, Bank of America increased its full-year private label issuance forecast by up to $20 billion to a range of $90 billion to $110 billion.
Not coming to the feast this year has been Fannie Mae and Freddie Mac. Multifamily securities issuance from the two government-controlled housing finance firms has fallen from $194 billion in 2021, to $135 billion in 2022, to $118 billion last year and only $41 billion so far this year, according to Bank of America.
Issuance by the finance agencies "has been surprisingly lighter than we expected coming into the year,” Todd said in a note. “We attribute this, in part, to limited acquisition activity among investors.”
Multifamily acquisitions in the first half of this year so far just recently surpassed the $40 billion level, according to CoStar data. That compares to nearly $145 billion in the first half of 2022.
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