As CMBS Delinquencies Hit All Time Record, Wall Street Looks For Greater Fools
After we read earlier that according to CRE experts TREPP, CMBS delinquencies have hit an all time record, we were confident that somehow Wall Street would do everything in its power to offload as much toxic crap from its books (and if inventory was missing, it would do its darnedest to create some) as possible, and start selling the most worthless piece of paper imaginable (see Howard Davidowitz). Sure enough, not much searching confirmed just that: per Bloomberg "Deutsche Bank AG, UBS AG and JPMorgan Chase & Co. are preparing the year’s first bond sales tied to commercial property loans, according to people familiar with the transactions. Deutsche Bank and UBS are teaming up to issue as much as
$2.5 billion in commercial mortgage-backed securities linked to
loans on office buildings, shopping malls and hotels in what
would be the largest offering of its kind since the market froze
in June 2008, according to a person familiar with the deal.
JPMorgan plans to sell $1.5 billion in similar debt, a person
familiar with that sale said." And investors, giddy with new costless capital and generous to waste 'other taxpayers' money' will line up in droves and gobble it up (many on margin), looking for a quick flip. Cue in the summer of 2007.
Incidentally, if there really was a recovery, shouldn't landlords be able to demand better pricing terms from their tenants, who are all presumably suddenly flush with case? Oh wait... this is one of those fact things that are so very unpleasant to the lemming brigade. Just BTFW.
More on December's record deterioration in that key secondary real estate market from Housing Wire:
The delinquency rate on commercial mortgage-backed securities reached 9.2% in December, the highest on record, according to analytics firm Trepp.
When the delinquencies dipped in October, analysts began anticipating a continued recovery, but the rate jumped 35 basis points in November and another 27 bps in December. A total of $61.5 billion in commercial mortgages are either more than 30 days delinquent, in foreclosure or REO as of December, up from just over $60 billion the month before.
Trepp Managing Director Manus Clancy said many were speculating that an emergence in new commercial lending and the resolution of many CMBS loans that the commercial real estate crisis had subsided.
But Trepp said new issuances of CMBS from JPMorgan Chase, another from Goldman Sachs and more coming from Bank of America should keep new delinquencies in check in 2011. Still, the market is far from healed.
"The December delinquency rate underscored that there still may be some nasty surprises in store even as the market shows some signs of healing," Clancy added.
And for a more detailed look at the CRE market, we present Realpoint's most recent CMBS report.
Other concerns / dynamics within the CMBS deals we continue to monitor which may affect the overall delinquency rate due to current credit market conditions for the remainder of 2010 include:
- Balloon default risk remains an issue from highly seasoned CMBS transactions as loans are unable to payoff as scheduled. In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, mostly due to a lack of available refinance sources. In some cases little or no amortization has taken place due to interest-only payment structures, while collateral values have also declined. Large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties reaching final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
- Depressed commercial real estate values and diminished equity in collateral properties continue to prompt more struggling borrowers with marginal collateral performance to claim imminent default and ask for debt relief. The aggressive pro-forma underwriting on loans originated from 2005 through 2008 vintage transactions, comingled with extinguished debt service / interest reserves required at-issuance, has led to an increasing number of loans with an inability to meet debt service requirements from in-place cash flow. This is especially evident with the partial-term interest-only loans that will begin to amortize or those that have recently converted.
- The Federal Reserve recently reported in its Beige Book results for October and November 2010 that conditions in the commercial real estate sector remained subdued and reports have suggested that rental rates continued to decline for most commercial property types. Several Districts reported flat demand and high vacancy rates, which translated into limited nonresidential construction activity. A few Districts noted some weakening in nonresidential activity, while others indicated some modest improvement in commercial real estate. Reports noted that most new projects fell generally into the infrastructure category, and contacts expressed some optimism about the near-term outlook in their Districts, but contacts in several other Districts expressed a more cautious outlook.
- Construction was expected to remain weak. Office, industrial and retail rental markets remained weak, although there were a few reports of slight increases in leasing activity. Commercial property sales were low overall, but investment demand for distressed commercial properties remained strong. Sales and construction are expected to remain subdued through year-end 2010 as tighter credit standards for buyers and small builders, along with general economic uncertainty, were stalling activity.
- Increased interest for vacant retail space and pent-up demand may fuel a recovery for the sector. The Fed previously reported that retail spending was flat to moderately positive in most Districts as back-to-school spending boosted sales. Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items. Looking ahead, retailers in several Districts expected modest sales growth through year-end (including the impact of “pop-up” retailers occupying temporary space).
- Despite some signs of recent optimism, a cautious outlook for the hotel sector remains as many sizeable hotel loans from 2005-2008 vintage pools have had to significantly lower rates to maintain an acceptable level of occupancy across the country and in some cases have experienced severely distressed net cash flow performance as a result. Our expectations are that more of these loans may be asking for debt relief in the near future and may ultimately continued improvement in travel and tourist activity. A growth in business travel and convention activity was noted while occupancy for popular tourist destinations rose during the reporting period and was above year-ago levels.
- Multifamily statistics have also shown that decreased concessions and a rise in rents in some markets may ultimately lead to improved cash flow performance, if supply remains limited.
- In many office markets, rents could potentially reset with hopes of growth as we enter 2011. Demand for commercial and industrial loans remained weak as businesses continued to postpone capital spending plans because of economic and public policy uncertainties. According to the Fed, merger and acquisition lending has picked up in a few Districts while lending remained subdued and loan standards were still tight.
- On the other hand, special servicers will play a key role in the level of delinquency reached in the next 12-24 months as large loan modifications, lender financing (through discounted assumptions and modifications prior to foreclosure), maturity extensions and approved forbearance have the potential to slow down or mitigate delinquency growth and delay losses. In addition, while vacancies across most if not all property types are near historic highs, optimism has recently surfaced regarding asking rents and vacancy across distressed loans. Liquidations on smaller balance loans, however, may continue based upon volume and time constraints, etc. Money that has been on the sideline for some time as well as foreign investment funds have slowly begun to show signs of re-entering the commercial real estate markets to take advantage longer term equity plays on inherent collateral value.
- Regarding new issuance, as the market continues to grow in 2011, some delinquency growth we have experienced in the trailing 12-months may be offset by any new issuance’s speed to market. As liquidations of severely distressed defaulted loans picked up speed in the latter half of 2009 into 2010, and modifications or forbearance at the loan level continue to be discussed between borrowers and special servicers, there may be a delinquency “leveling-off” period through year-end 2010 or early 2011.
Full report link.