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