The commercial property market is in for some big changes this year. It seems that money lenders will want commercial property owners to have more “skin-in-the-game” that is more collateral value from the investor. The risk commercial lenders are taking is becoming excessively high for them to accept. There is a need for lowering their exposure due to so many changes in the underwriting valuations for the year. Commercial Mortgage Back Securities (CMBS) lenders will be looking for

better debt service on their existing and future loans. This will be about a tempering of investors having the ability for refinancing their existing loans this year. Historically loans of this nature have been done on an Interest Only basis (no amortization on a 5-year loan with a 25-year repayment schedule). In 2012 lenders will look for borrowers that will increase their property amortization and will be less willing to refinance. The lenders want to limit their risks and increase their returns.

Lenders in 2012 will need a means for protecting themselves from what is surely an erosion of commercial property collateral value. They are seeing the need for more protection against inflation loss. All of this will bring about higher equity participation requirements for the borrower. Commercial properties will undergo tighter appraisals forcing equity requirements higher and the need for borrowers to increase their exposure while lowering the mortgage holder’s exposure. The anticipation is that inflation will bring about a loss for the lender so they will want to increase their protection in 2012.

What this all means is that for many owners of office buildings, hotels, shopping malls, and other commercial real estate properties who are financing their properties using five-year mortgages and that mature in 2012, trouble is ahead. They will find that automatic refinancing at the new lower rates will not apply for them especially if their properties are under water. There property owners will have to come up with additional cash or refinance at substantially higher interest rates. We are talking about some adjustable rates (ARM) going from less then 1% to possible around the 5% level.

According to Trepp, a company that tracks mortgages packaged into securities, of the $70 billion in commercial mortgage-backed securities outstanding that are coming due next year, $15.5 billion of fixed-rate mortgages and $12.2 billion of adjustable-rate mortgages have been flagged as potentially facing tough hurdles when they try to refinance.

Analysts and industry executives say it is difficult to predict how many of the maturing commercial property loans will wind up in default because they cannot secure a new mortgage. The delinquency rate that has risen from 0.3% to 9.5% in the last three years through November will likely rise further, according to Trepp and other analysts.

 2012