CRE Update: CMBS Deterioration Accelerates, L.A.'s 550 South Hope Tower Appraised At Half 2007 Value

Tyler Durden's picture

August CRE trends continued their downward trends, with a bevy of trackers of CMBS performance, Moody's, Fitch, Realpoint and TREPP seeing substantial deterioration in September. According To TREPP the August delinquency rate was up to 4.35% from 4.03. Legacy rating agencies Moody's and Fitch indicated a comparable acceleration in delinquency trends, with September 60-delinquencies at 3.64% and 3.58%, up from 3.04% and 3.23% respectively. New CRE NRSRO Realpoint had an even higher September reading at 4.15% up from 3.47% in the previous month.

This deterioration is in line with the Moody's Real CRE Index, which showed continued decline in apartment value, at 131.9 in June, down 24.4% from a year ago, when TREPP had apartment delinquencies at just 1.72%, and has now risen to 7.05%. Additionally, it sees hotel delinquencies at 6.72%. Practically put, this means that over $8 billion of apartment loans and $5 billion of hotel loans are more than 30 days late. Look for both of these numbers to decline significantly.

The apartment delinquency rate is set to have a step-wise deterioration any second, as the rate does not include $3 billion in securitized debt associated with the Stuy Town which is about to have much bigger problems than mere delinquency, as the $650 million in initial reserves run out in December as Zero Hedge discussed previously. When Stuy Town becomes delinquent, the apartment delinquency rate will finally surpass 10%.

And for a real-life example of the merciless deterioration in CRE, this week's shining example is the 566,000 sq. foot office building at 550 South Hope Street in Los Angeles, which last month was reappraised at a stunning $121 million: a whole $114 million less than its 2007 appraisal value. That was the time when a $165 million mortgage on the property was securitized. As the CMBS deal will now be hit with interest shortfall payments, CMBS investors can not be happy, especially the junior tranches. The way interest shortfall are effected is that master servicers advance payments to bondholders on loans that are delinquent until loans are reappraised. Once appraised, the amount of advances gets reduced by the new collateral value, with the resulting delta called an appraisal subordinate entitlement reduction (ASER) and, as expected, results in a shortfall of interest payments that first impacts the most junior CMBS tranches then goes up the deal.

The other notable thing about the deal is that the CMBS deal securitizing the property, GS Mortgage Securities Corp., II, 2007-GG10, is one of the largest CMBS deals ever issued and is very widely held. The property was part of a major $3 billion portfolio acquisition by near-defunct Maguire Properties, which bought 550 South Hope and several other assets from Blackstone. MPG which earlier this year was on the verge of bankruptcy, stated it would stop subsidizing six properties and work with loan services to dispose of collateral in an orderly fashion. In addition to GG10, MPG also owns $103.5 MM of debt on 500 Orange Tower in Orange, CA., famous for being next door to the Anaheim Angels stadium. This loan is likely to be impaired quickly once MPG's guaranteed payments expire in December, and as expected market-rate lease rolls have failed to materialize, thus putting the expected $11.9 million in needed net cash flow annually in jeopardy.

Via CRE Direct, h/t Bankster

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geopol's picture

And the downturn picks up speed,, in the CMBS. We are now on the edge of massive CRE crash


SWRichmond's picture

So how long before they ban shorting?

Anonymous's picture

The "massive CRE crash" may not last very long unless creditors are willing to stick their head in the sand and do nothing, leaving the market paralyzed.

If they act promptly, they will take control of properties and dump them on the market creating massive bargains for buyers funded by private equity and REITs that have issued lots of new debt and equity this year.

At the end of the day, when the properties move into stronger hands at much lower prices, the rents that the new owners can sustain will be so low that they will create a second wave of defaults a few years from now as rents crater.

Am I missing something here?

Anonymous's picture

It's a great time to buy REITs and regional banks! (end sarcasm)

Ghettomedic's picture

Risk and reward. It is a good time to buy REITs. No sarcasm.

Charley's picture

I prefer the web friendly version:

<sarcasm>It's a great time to buy REITs and regional banks!</sarcasm>

reading's picture

Sort of feels like Deja Vu...there was all that prelude including subprime will be contained before housing fell off the cliff. Feels like the same thing...ignore, ignore, pretend your ignoring, but at some point investors/holders have to start dumping so they are not the last ones out.  We've tried for six months to will the economy to be strong -- unfortunately however much a lagging indicator people want to call it, if someone doesn't have a job and no longer has their house atm things are not going to magically be better. 

geopol's picture

Hey reading


to will the economy to be strong, ya MSM


You can't will OUT from the laws of physics.

Unscarred's picture

It seems appropriate that the South Hope tower will need a Hail Mary from the bank of  Obama Geithner & Co. (O.G. & Co.) to remain solvent.

Anonymous's picture

Na Na Pelosi and her fish trick to turn Cali farm land into affordable housing seems to have run into a snag. Real affordable housing is coming though and there is nothing TPTB can do to stop it! This should be fun Pelosi and her husband are neck deep in this. They can't blame Joe6 and predatory lending this time.

Anonymous's picture


: )


D.O.D.'s picture

CRBC, she's gonna goooooo! Looks like AIG before the gov't take over, quick, now's your chance to cash in on the next bailout!!!!



Unscarred's picture

Now how did I know that right after referencing O.G. & Co. that the CEO HIMSELF was gonna sho-up an' represent?!

D.O.D.'s picture

I prefer Prifitizah, but CEO will work for ya'll white callars...

Unscarred's picture

I hear ya, White-Collar Holla-Holla!

Dis is how I git down, Cuz:

Fritz's picture


Everything below AA rated just turned into a Mezz tranche on CMBS.

What the REIT pumping/yield chasing crowd is missing is the huge amount of 5 year paper issued in '05-06 that was done at high LTV-low amortization.

Got Refi?


geopol's picture

By someone who should know,,

Paul Craig Roberts assistant secretary of the treasury under Ronald Reagan has officially decalred America a failed state..

digalert's picture

Funny, right around that part of downtown there's another infamous place, skid row.

geopol's picture

I'm going to past this here as I think this is so idicative of the macro issues that we are facing. We are now embarking on some very serious shit here. We all post here what we think are relevent opinions and we joke now and then to break the tension, but I'm feeling total dread... This colum from Paul Craig Roberts.

US Joins Ranks Of Failed States

By Paul Craig Roberts 

The US has every characteristic of a failed state.  

The US government’s current operating budget is dependent on foreign financing and money creation.  

Too politically weak to be able to advance its interests through diplomacy, the US relies on terrorism  and military aggression.   

Costs are out of control, and priorities are skewed in the interest of rich organized interest groups at the expense of the vast majority of citizens.  For example, war at all cost, which enriches the armaments industry, the officer corps and the financial firms that handle the war’s financing, takes precedence over the needs of American citizens.  There is  no money to provide the uninsured with health care, but Pentagon officials have told the Defense Appropriations Subcommittee in the House that every gallon of gasoline delivered to US troops in Afghanistan costs American taxpayers $400.

"It is a number that we were not aware of and it is worrisome," said Rep. John Murtha, chairman of the subcommittee.

According to reports, the US Marines in Afghanistan use 800,000 gallons of gasoline per day.  At $400 per gallon, that comes to a $320,000,000 daily fuel bill for the Marines alone.  Only a country totally out of control would squander resources in this way.

While the US government squanders $400 per gallon of gasoline in order to kill women and children in Afghanistan, many millions of Americans have lost their jobs and their homes and are experiencing the kind of misery that is the daily life of poor Third World peoples.  Americans are living in their cars and in public parks.  America’s cities, towns, and states are suffering from the costs of economic dislocations and the reduction in tax revenues from the economy’s decline.  Yet, Obama has sent more troops to Afghanistan, a country half way around the world that is not a threat to America.  

It costs $750,000 per year for each soldier we have in Afghanistan.  The soldiers, who are at risk of life and limb, are paid a pittance, but all of the privatized services to the military are rolling in excess profits.  One of the great frauds perpetuated on the American people was the privatization of services that the US military traditionally performed for itself.  "Our" elected leaders could not resist any opportunity to create at taxpayers’ expense private wealth that could be recycled to politicians in campaign contributions.

Republicans and Democrats on the take from the private insurance companies maintain that the US cannot afford to provide Americans with health care and that cuts must be made even in Social Security and Medicare.  So how can the US afford bankrupting wars, much less totally pointless wars that serve no American interest?

The enormous scale of foreign borrowing and money creation necessary to finance Washington’s wars are sending the dollar to historic lows. The dollar has even experienced large declines relative to currencies of third world countries such as Botswana and Brazil.  The decline in the dollar’s value reduces the purchasing power of Americans’ already declining incomes.

Despite the lowest level of housing starts in 64 years, the US housing market is flooded with unsold homes, and financial institutions have a huge and rising inventory of foreclosed homes not yet on the market.

Industrial production has collapsed to the level of 1999, wiping out a decade of growth in industrial output. 

The enormous bank reserves created by the Federal Reserve are not finding their way into the economy.  Instead, the banks are hoarding the reserves as insurance against the fraudulent derivatives that they purchased from the gangster Wall Street investment banks.

The regulatory agencies have been corrupted by private interests.  Frontline  reports that Alan Greenspan, Robert Rubin, and Larry Summers blocked Brooksley Born, the head of the Commodity Futures Trading Commission from regulating derivatives.  President Obama rewarded Larry Summers for his idiocy by appointing him Director of the National Economic Council.  What this means is that profits for Wall Street will continue to be leeched from the diminishing blood supply of the American economy.

An unmistakable sign of  Third World despotism is a police force that sees the public as the enemy.  Thanks to the federal government, our local police forces are now militarized and imbued with hostile attitudes toward the public.  SWAT teams have proliferated, and even small towns now have police forces with the firepower of US Special Forces.  Summons are increasingly delivered by SWAT teams that tyrannize citizens with broken down doors, a $400 or $500 repair born by the tyrannized resident.  Recently a mayor and his family were the recipients of incompetence by the town’s local SWAT team, which mistakenly wrecked the mayor’s home, terrorized his family, and killed the family’s two friendly Labrador dogs.

If a town’s mayor can be treated in this way, what do you think is the fate of the poor white or black? Or the idealistic student who protests his government’s inhumanity?

In any failed state, the greatest threat to the population comes from the government and the police.  That is certainly the situation today in the USA.  Americans have no greater enemy than their own government.  Washington is controlled by interest groups that enrich themselves at the expense of the American people.  

The one percent that comprise the superrich are laughing as they say, "let them eat cake."

RobotTrader's picture

Heh, watch this one take off....

Biggest underwater landlord in downtown L.A. and Irvine.

Especially in the "O.C.", ground zero for all the subprime lenders...



Unscarred's picture

Best looking charts in weeks.  Thanks Robo.

SWRichmond's picture

I like it when they pull on each other's straps like that....I mean, great chart!

Lionhead's picture

The "lines" of support & resistance are most impressive. ;)

geopol's picture

Ya, reminds me of cargo nets.

Unscarred's picture

I think these last two charts are firm enough to not worry any support lines.  I'll give them another 3 years, maybe 4, until we see some type of sagging.  Of course, when that happens, sell to close IMMEDIATELY.

geopol's picture

I think your are stretching this to far.......

Anonymous's picture

"appraised at a stunning $121 million" against a "$165 million mortgage" and the biggest problem is "interest shortfall payments"?!?!

Anonymous's picture

The thing that blows me away is - why? o! why? would someone be long an instrument like this CMBS that can't be sold with a mouse click? And, if they're hedged at all, hedged with an identically illiquid instrument?

Anonymous's picture


Buying and selling with a mouse click is exactly what got us into this mess.


Anonymous's picture

The China Containerized Freight Index

Anyone know where we can find charts for this index?



So far Ive got these, looking for good truck tonnage and air freight charts as well.

Rail Index

Baltic Dry Index

Anonymous's picture

wow, TD, your story shows up twice in BBG under NI CMBS .

geopol - how 'bout next time using a link instead of copying & pasting a copyrighted story that is 75% longer than the initial post in question, has nothing to do with the subject matter, and instead focusing on the Iraq War and macroeconomic issues. The author is so full of himself, that he closes with a phrase that has been widely proven to have been mis-attributed, and was in fact popularized in a certifiably insane author's book who pushed for socialism and primitivism (that probably isn't a word, yet) publicly, while privately enjoying the high life and orgies (kind of jekyll & hyde, or democrat & republican).

geopol's picture

That was a hell of a  speech...


Your easy

Unscarred's picture

Gravitas, geopol.  Gravitas.

geopol's picture

China is no longer shipping to walmart,,so what,,don't be alarmed

geopol's picture

Or we can keep piling up containers at long beach, and turn them into low income housing.

deadhead's picture

that's funny...good line!

i actually saw one of those 'extreme homes' shows where someone put together a couple of shipping containers to make a home.

geopol's picture

Hey deadhead,

I say that because I really did see where an architect had designs to convert them into low income housing, welding four together, in some configuration. At the time I thought this was over the top, but today, contemporary idea.

deadhead's picture

the place on extreme homes was really very nice....of course, it cost a fortune based on what they did.

kind of the old "stone soup" parable.

geopol's picture

HGTV,,The network of lost dreams............ Dream home 2010 take a left at hell's kitchen then at the stoplight go.........

lesterbegood's picture

There's a rumor floating around about a 5 trillion dollar lawsuit being prepped and filed against the SEC for negligence?

greased up deaf guy's picture

is it still a rumor after 2-1/2 years?  please check the date of the article in your link...

Anonymous's picture

Anytime anyone mentions the SEC I get a chill running down my spine

The SEC is full of Ghosts!

booooooooooooo scaaaaaaaaaaaaaaaaaaaaaaaaaaary!!!

You are creeping me out now Lester

: )


geopol's picture

It will take about six hundred grave diggers at  3am to pull the body's out of that place.


Muhahahahahahahaha   Bernie,,,,,,Oh Bernie,,,,,,Bernie M..... where are you!