Browse Tag: CMBS

CMBS Credit Risk Elevated By Louisiana Floods

A group of 302 Louisiana properties backing over 200 loans totaling approximately $1.1 billion in allocated property balance have, according to Morningstar credit ratings, elevated default risk due to the flooding in the area.

The August 12 floods killed 13, dumping three times as much water on southern Louisiana as did Hurricane Katrina in 2005. The areas surrounding Baton Rouge and Lafayette have seen the worst damage, prompting evacuations of at least 30,000.

Multifamily and Retail Properties Hit Hard

Affected commercial properties located in the 20 flooded Louisiana parishes included a group of the ten largest properties in the area.  The properties make up about a quarter of the portfolio backing a 2014 Freddie Mac offering totaling over $1 billion. Morningstar called leasing agents at the properties but could confirm flood damage at only one of the ten, a multifamily complex. In Livingston Parish — the hardest-hit in the area according to the Baton Rouge Chamber of Commercce — multifamily, self-storage and stand-alone retail properties stand amid the 86% of housing that experienced flooding. Morningstar’s research identified the Freddie Mac CMBS has the most exposure to multifamily properties, with loans backing 52 such, totaling over $700  million.

Renter Demand Uptick?

According to Urban Land Institute:

Although there is risk that many of these properties were damaged by the floods, reports indicate that the Baton Rouge area is undersupplied, so undamaged multifamily properties may see increased demand as people seek out new homes.

According to the Baton Rouge Area Chamber report, retail, which accounts for 31.8 percent of the CMBS exposure in the area, was the hardest-hit industry. Even properties that may not have been damaged may feel the effects of the disaster. Although the economic effects of the flood are still uncertain, malls will likely see reduced foot traffic over the coming months. As a result, we believe that the $126.9 million Mall of Acadiana loan in BACM 2007-2 may suffer from the aftereffects of the floods, even though all stores in the mall were open for business at the end of last month.

The flood costs to the people of Louisiana are incalculable, but the soaking could well spread to investors and taxpayers — even as the Freddie Mac guarantees are in place to protect principal and interest payments, the shock of a rare event like 2016’s Louisiana flooding has put the structure in all of structured finance to the test.


Meet H.R. 4620: Preserving Access To CRE Capital Act

Earlier this month, the US Senate Banking Committee held a hearing critical to borrowing in the commercial real estate industry.  The hearing, entitled “Improving Communities’ and Businesses’ Access to Capital and Economic Development” included discussion of a House bill introduced by Rep. French Hill (R-AR) tagged H.R. 4620, the “Preserving Access To CRE Capital Act”.

The Act, according to a May 19 letter sent from NAR President Tom Salamone,  makes a modest yet important change to the “Qualified Commercial Real Estate” (QCRE) exemption to the commercial real estate risk retention rules slated to go into effect in December of 2016 under Dodd-Frank.

The issue centers on the class of commercial mortgage-backed securities (CMBS) called single-asset, single-borrower, or SASB.  In his letter, President Salamone continues:

The Preserving Access to CRE Capital Act makes a modest but important change to the “Qualified Commercial Real Estate” (QCRE) exemption to the commercial real estate risk retention rules slated to go into effect in December 2016. These impending rules are, as written, overly broad. Single asset/single borrower (SASB) commercial mortgage backed securities (CMBS) are not exempt, despite being low-risk, and not the type of transaction the Dodd-Frank Act was intended to regulate. Rep. Hill’s legislation would fix this oversight by widening the QCRE exemption to include SASB and interest-only loans. Without this fix, liquidity rates will be impaired and borrowing costs will go up.

CMBSs are important sources of financing for commercial real estate projects of all kinds, providing about 25% of all commercial real estate lending in the country1 . They are especially important in secondary and tertiary markets, where they provide a significant portion of the financing for smaller, “Main Street” businesses. Arbitrarily reducing liquidity in the CMBS market will thus reduce liquidity across the board and raise borrowing costs for commercial real estate loans in all markets.

H.R. 4260, introduced in the house in February, promises to address the problem of overly broad risk retention rules.  To learn how, you can read the entirety of the bill after this link.

Risk Retention: The New CMBS Rules

The New York Stock Exchange, the world's large...

The Wall Street Reform and Consumer Protection Act (also known as Dodd-Frank) was written in part to address the 2007-08 systemic risk crisis in credit markets caused by the mispackaging and mislabeling of bonds made up of collections of mostly residential mortgages that went bust. The banks that performed the packaging, regulators reason, each contributed greatly to the giant and hidden risks by routinely selling off the bonds they packaged. These were sold in their entirety, meaning the bank’s risk was effectively zero if it happened that the contents of the bond were found later to be in default.

Risk Retention

What if, instead of being allowed to ship off truckloads of possibly mislabeled product, the packager was compelled by law to  own a percentage of each package (bond) themselves? The systemic risk of the bond — and of the mortgage-backed bond business generally, regulators reason, would then have a built-in limit by forcing the packaging bank to “have skin in the game” themselves.

Enter a provision of the 2010 Dodd-Frank law called “risk retention” set to come online December of this year that does just that by requiring the issuing bank to “eat its own dog food” — requiring 5% of the resulting bond to be held by the bank, so that default risk aftermarket is shared by the bank.

CMBS Exemption

What might be news in the commercial real estate space is that the commercial equivalent to residential mortgage-backed securities, called, unsurprisingly enough, commercial MBS (CMBS), has an exemption from the above kind of risk retention under Dodd-Frank.  This is detailed well in today’s Bloomberg piece by Sarah Mulholland “Wall Street Girds For Real Estate Debt It Must Invest In”:

The new requirement, dubbed risk retention, applies to all types of securitization, the process by which debt is pooled together and sliced into bonds of varying risk and reward. Such offerings backed by home loans were ground zero for the financial crisis.

The changes are creating an opportunity for real estate investors. Industry lobbyists won a concession from lawmakers to create an exemption for the CMBS market, allowing a third party to take on the risk on behalf of lenders as long as they agree not to sell their investment for at least five years. Banks will be held legally accountable if the firm they sell to violates the rules.

The CMBS market has a built-in cohort, called B-piece buyers, that buys the riskiest portions, absorbing losses first in exchange for a hefty yield. Firms including Ellington, DoubleLine Capital and KKR & Co. have entered the space in recent years, which was dominated by a handful of specialists prior to the financial crisis. Several B-piece buyers are seeking to raise funds to step in for the banks, though it may be difficult to find investors willing to lock up their cash for five years or more, said Warren Friend, an executive managing director at Situs, a commercial real estate consulting firm.

Securitization of real estate debt on the commercial side may never present the kind of systemic risk that brought us a giant recession, in part due to the underlying illiquidity that commercial properties tend to represent. That said, CRE investors living in the world of Dodd-Frank face a different landscape than before, hopefully not one where risk pitfalls are more hidden.

Photo Credit: Wikipedia

CMBS Update: Resolving Defaulted Loans And Plummeting Delinquencies



The news in the commercial mortgage-backed securities (CMBS) market is positive year-over-year for the five major property sectors.

As suggested by earlier announcements by credit rating agencies including Fitch, distressed commercial real estate assets are receiving the benefit of special servicing, often by third parties, that are lending stabilization to the CMBS market.

From Fitch:

Fitch Ratings-New York-01 May 2014: Delinquencies are likely to continue to recede and special servicer resolutions of distressed assets are likely to continue, supporting the U.S. CMBS market’s stabilization, Fitch Ratings says. We expect rating upgrades to continue to exceed downgrades for the near term. Most downgrades will be in below investment-grade classes. 

In first-quarter 2014, Fitch upgraded 87 classes. For the same period last year, only eight classes were upgraded, with 58 classes upgraded for all of 2013. Downgrades shrunk to 119 classes compared with 333 for first-quarter 2013 and 864 classes total in 2013.

According to Globe St.’s Paul Lubny, nearly 12.5% of industrial CMBS loans were delinquent one year ago.

The number today?  8.94%.

May saw $1.3 billion in new delinquencies, offset by $1 billion in resolutions and $800 million in cured loans. Accordingly, the total balance of delinquent loans fell to $33.6 billion from $34.1 billion in April.

“The CMBS market continues to just plug along nicely,” says Manus Clancy, senior managing director at Trepp. “In each of the past two years, the market has seen springtime swoons that led to noticeable spread widening;” however, at present new-issue spreads “are near their 2014 tights, the new-issue dance card is full for the next few months and the resolution of defaulted legacy loans continue to push the delinquency rate lower.” However, Bank of America Merrill Lynch earlier this month cut its full-year forecast for new issues.

8.94% Is Good News — For Certain Values Of “Good”

It’s no doubt been a good year for structured credit and commercial real estate, one of unambiguous recovery.  Will it hold up? Time will tell.  But one thing we can already tell is that celebrating a delinquency rate in the 8% range is a concept that was utterly alien to the earlier adopters of CMBS as a financial innovation.

To see what I mean, check out this 2002 report from the Commercial Mortgage Securities Association, written by then-Morgan Stanley associate Marielle Jan de Beur.

Seems like the common rate of CMBS delinquencies back then…was closer to 1%.

The industry’s got a lot more recovering to do.


Moody’s: Commercial Real Estate Keeps On Improving

Pictures of raised thumbsMoody’s Q1 2013 US CMBS and CRE CDO Surveillance Review is out.  The verdict?  Somewhat slower commercial real estate improvement throughout 2013 but improvement nonetheless.

Sector fundamentals will drive improving market conditions, making a significant rise in losses on loans backing US commercial mortgage securitizations (CMBS) unlikely.

 “Commercial real estate continues to benefit from limited construction and positive absorption, which have supported a positive market dynamic despite lingering concerns about the strength of the economic recovery” says Michael Gerdes, Moody’s Managing Director and Head of US CMBS & CRE CDO Surveillance.

 “As in the fourth quarter of 2012, multifamily and hotel both performed strongly and will continue to do so over the next year, albeit at a more modest pace,” Gerdes adds. “The recovery of office and retail has been more muted, but performance will strengthen in tandem with employment and economic growth.”

 Moody’s central global scenario hasn’t changed.

 “It calls for subdued GDP growth in the US of around 2% for 2013,” says Gerdes. “Business confidence will strengthen as the economy continues to recover at a slow but steady pace.”


Among the individual sector highlights:

The retail sector will have modest gains, with positive rental growth by the end of 2013. Consumers still appear cautious because of slow economic growth, but the sector is showing signs of life. Vacancy rates declined 30 basis points, the largest drop since 2005.

Office vacancy and rental rates will improve moderately in 2013, with market performance differentiating according to regional employment growth. In addition, absorption is likely to continue to outpace completion in the next few months, which will assist in the sector’s continued slow but steady recovery.

Hotel will continue to grow, but at a slightly slower pace. Year-over-year RevPAR (revenue per available room) was up 6.4% in first-quarter 2013 from first-quarter 2012, with the greatest increases in both chain scale and luxury and hotels. The top market performers were Oahu Island, Hawaii, and Miami-Hialeah, Florida.

Multifamily will also continue to perform well. Absorption continues to outpace completions, and vacancy rates remain low. Rents are still growing but at a slower rate. Fifteen markets had vacancy rates below 4.0%, including Miami and Newark, both of which boasted vacancy rates of less than 3%.

The full report is available for Moody’s subscribers at–PBS_SF327646.


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Hurricane Sandy: The Commercial Property Toll

Crane Collapse on 57th Street
Crane Collapse on 57th Street (Photo credit: Sarah_Ackerman)

First, the good news. With thoughts to those on the eastern seaboard still struggling with interrupted electrical, infrastructure damage and the like, it appears that the aftermath of Hurricane Sandy is not going to seriously disrupt the wider US economy.  That’s not to minimize the very real trials of our friends out east, it’s rather to put things into perspective. Sandy’s huge impact up against the monumentally enormous, single largest economy in the world  – the $14 trillon GDP US economy – means at a big enough scale, Sandy might just be a blip on the books.

That said,  Sandy’s impact to commercial property in the northeastern seaboard is significant and still being compiled:

  • Some risk management professionals are touting disaster models that say that Sandy will top out last year’s $4.7 billion in damages left by Hurricane Irene.
  • Bloomberg reports a significant fraction of lower Manhattan’s office space is still not fit for occupation.  Reports were up to a third as of November 13th.
  • The Fed puts Sandy’s impact on industrial production at a loss of 0.4% in October.  Excluding Sandy’s impact, production at US factories, mines and utilities would have been up about 0.6 percent.
  • Due to the closure of Wall Street, delays were felt in pricing of over $7 billion worth of commercial mortgage-backed securities, including bond issues from Motel 6 and Las Vegas’s Fashion Show Mall.
  • Sandy-induced interruptions in the foreclosure pipeline ranged from courthouse closings to the GSEs announcing a 12-month freeze on New York and New Jersey foreclosures on loans held by Freddie Mac.
  • Commercial lease terms plus Sandy equals rent interruptions.  Since most commercial leases stipulate a landlord needs to provide working conditions as a stipulation for collecting rent payments, landlords are either dipping into their own pockets to find space for tenants in unaffected areas, or seeing no rent as the recovery proceeds.
  • Physical damage to structure and contents of office, industrial, retail and multifamily.
  • Business interruption caused by storm surge.
  • Losses to infrastructure and follow-on business interruptions. See: flooding of tunnels and subways.
2005’s Katrina topped $100 billion in damage; the number suggest that this time around, New York and New Jersey could have had it worse with Sandy.

Commercial Loans Up, Hotel Market Trending in Right Direction

W Hotel Times Square lobby
Image by marcus_jb1973 via Flickr

The latest bit of good news: according to data gathered from the Federal Reserve, the amount of commercial real estate loans ticked up in April 2011.

Even better, the number of delinquent commercial RE loans has gone down in the hotels and lodging sector.  The data comes from Trepp, LLC, a leading provider of CMBS and commercial mortgage information, analytics and technology to the global securities and investment management industries.   The decrease in delinquent loans found across the country came in at a whopping 52 basis points bringing it down to 15.45%.   You can find more evidence of this positive movement from Crain’s Chicago Business.

Also on the sunny side: Colliers International says industrial real estate is poised for a rebound.  The brokerage believes manufacturing is coming back with a vengeance in several primary markets such as Chicago, Dallas, New Jersey and a few more.

What are some strategies for brokers?  While we are waiting for many of these sectors to recover, we still have the lowest interest rates in history, so brokers should recognize it’s an ideal time for those businesses with solid cash flow and a great credit rating to take advantage of the market.  Since there are only a finite number of these type of clients, many commercial brokers have gotten creative and have taken to listing and leasing more properties than they have done in the past.  These type of deals are smaller in transaction number, but are more plentiful in today’s market.  Yes, it’s a lot more work for less money, but it’s a great way to push the market until things improve.  It’s also a great way to build relationships with those business owners who don’t have stellar credit, but do have a great product and decent cash flow,  who could turn into a loyal client because you were willing to work with them when they needed you the most.

Consider specialization – many brokers are now specializing in green buildings or industrial make-overs in up and coming areas in order to carve a niche out for themselves, too.   This is the type of market where there are opportunities to be had and relationships are waiting to be built to take you into the improving market conditions.