On one hand you have Moody's REAL CPPI index telling you commercial real estate prices not only bottomed in December, but are now increasing at the fastest rate in years. On the other hand you have reality staring you in the face (that is if you are reading the February RealPoint CMBS report), in the form of $46 billion in CMBS delinquencies in January: this was a record 5.762% of total, and represents a 325% increase from the $10.8 billion inJanuary 2009 (and a 10% increase sequentially). Contrary to all propaganda punditry, the rate of deterioration in commercial real estate keeps accelerating. Oh, and this number does not include the $3 billion Stuy Town default, which will be counted for the first time in March. Look for the % of delinquent loans to hit 8%-9% within 6 months, about the time when TALF will be really needed. Too bad TALF expires the same day as Quantitative Easing for MBS ends, March 31.
More from Realpoint:
Overall, the total unpaid balance for CMBS pools reviewed by Realpoint for the January 2010 remittance was $797.3 billion, up slightly from $797.18 billion in December 2009 (affected by some servicer and trustee reporting delays). Both the delinquent unpaid balance and delinquency percentage over the trailing twelve months are shown in Charts 1 and 2, clearly trending upward. The resultant delinquency ratio for January 2010 of 5.76% (up from the 5.22% reported one month prior) is over four times the 1.281% reported one-year prior in January 2009 and 20 times the Realpoint recorded low point of 0.283% from June 2007. The increase in both delinquent unpaid balance and ratio over this time horizon reflects a steady increase from historic lows in mid-2007.
The $4.1 billion Extended Stay Hotel loan from the WBC07ESH transaction remained 90+-days delinquent in January 2010. Realpoint expects the delinquency for this loan to continue in the near-term until any modification or restructuring agreement is reached. In addition, the $3 billion Peter Cooper Village / Stuyvesant Town loan spread through multiple CMBS deals via pari passu structure is now expected to be reported delinquent in March 2010. On January 25, 2010, Tishman Speyer announced their intention to transfer title to the Lender via Deed-in-Lieu of foreclosure. The Borrower initially sought a forbearance (which was not granted), and ultimately did not make the full payment due in January 2010, which triggered a default under the mortgage loan. Funds have subsequently been swept from all reserves / escrows and applied to debt service in January and February 2010 (thus reserves are essentially depleted) and the borrower has indicated it will no longer fund debt service shortfalls.
Therefore, with the $4.1 billion delinquency of the Extended Stay Hotel loan, the expected delinquency of the $3 billion Peter Cooper Village / Stuyvesant Town loan, and the experienced average growth monthover-month, Realpoint now projects the delinquent unpaid CMBS balance to continue along its current trend and grow to between $60 and $70 billion by mid 2010. Based upon an updated trend analysis, we now project the delinquency percentage to grow to between 6% and 7% through the first quarter of 2010, potentially approaching and surpassing 8-9% under more heavily stressed scenarios through the mid-2010). This forecast / outlook is driven by the watchlist reporting of several Realpoint identified High Risk Loans from recent vintage transactions that continue to show signs of stress and are on the verge of delinquency, along with continued balloon maturity defaults from more seasoned transactions. As part of our monthly surveillance efforts of every CMBS transaction, we continue to monitor in detail many large Realpoint Watchlisted loans that have never met their pro-forma underwritten expectations. This includes a large amount of loans that remain current in payments but have already been transferred into special servicing - many of which may ultimately default based upon a denial of requests for loan modifications or debt restructuring by the special servicers, or a decision by borrowers to surrender the collateral.
With TALF expiring soon, is it time to start, if not panicking, then realizing that mere good intentions and a large vocabulary will not do much for the billions in missing interest expense that will result in creeping defaults across all CMBS classes and vintages.
For those who still believe glimmers of reality may eventually creep into capital markets, here are RealPoint's near-term projections.
- Over the past three months, delinquency growth by unpaid balance has averaged roughly $4.47 billion per month. Assuming ongoing monthly pay-down and liquidation activity, if such delinquency average were increased by an additional 25% growth rate, and then carried through the first quarter 2010, the delinquent unpaid balance would reach $57 billion and reflect a delinquency percentage slightly above 7% by March 2010. Carried through mid-2010, the delinquent unpaid balance would top $73 billion and reflect a delinquency percentage above 9.5% by June 2010.
- In addition to this growth scenario, if we again add-in the default of the $3 billion Peter Cooper Village / Stuyvesant Town loan, the delinquent unpaid balance would reach $60 billion and reflect a delinquency percentage above 7.6% by March 2010. Carried through mid-2010, the delinquent unpaid balance would top $76.9 billion and reflect a delinquency percentage near 10% by June 2010.
For everyone else, we suggest you follow whatever the momo trade of the day is, and don't forget sell to some other greater fool. The latter is something the market has lots of. Until it doesn't.