Commercial Real Estate Debt Reaches $40B
(NEW YORK CITY, NY) -- The end of the line is near for commercial real estate borrowers unable to meet their repayment schedules or work out a new payment extension plan.
The bad-loan total has hit $40 billion and continues to climb, reports Trepp LLC, a commercial bonds and real estate loans statistician based in New York City and London.
The Treasury Dept. hired Trepp June 16 to create models that will guide what commercial mortgage-backed securities will be allowed as collateral for Fed funding, under its Term Asset-Backed Securities Loan Facility (TALF), according to the New York Federal Reserve Bank.
Commercial Mortgage Alert, a Hoboken, NJ-based industry newsletter, states the amount of commercial mortgages in special servicing continued to climb in June, reflecting the ongoing deterioration in credit quality, CMA says.
According to Trepp, another $3.8 billion of loans were transferred to special servicers last month. That increased the total by 10%, to $40 billion.
At the end of June, 5.39% of the total balance of securitized commercial mortgages was under the control of special servicers, up from 4.92% at the end of May.
CMA notes the special-servicing rate has now climbed for 14 months in a row and is 13 times higher than the record low of 0.40% in August 2007. The bulk of the increase has come since the end of last year, when the rate was 1.62%.
Master servicers transfer loans to special servicers when signs of trouble emerge. Special servicers attempt to work out the problems with the borrower and return the loan to normal status or negotiate a payoff. Failing that, the loan is liquidated and the proceeds are forwarded to bondholders.
CMA says the large number of loan transfers stems from two key trends: the poor performance of mortgages written as the bull market was peaking, and the inability of borrowers to refinance maturing loans because of the credit crunch.
"If the percentage of loans capable of refinancing stays low, it's hard to see these numbers leveling off," says Trepp managing director Manus Clancy. "Anything near its maturity date typically moves to special servicing. With more loans coming due in 2010 than in 2009, it will be hard to buck the trend."
"In perhaps the only silver lining last month, the net dollar amount of loans added to special servicing slowed for the first time since early this year," according to the newsletter.
But transfers still remained at a historically high level. Indeed, the 47-bp increase in the special-servicing rate was the third-highest ever, after a 174-bp spike in May and a 57-bp rise in April.
The increase in May, which represented a net $12.4 billion of loan transfers, stemmed in large part from General Growth Properties' bankruptcy. The REIT's filing triggered the automatic transfer of its mall loans to special servicers, even though most of the properties continue to perform well.
Meanwhile, by straight count, the number of loans added to special servicing continued to grow. In June, there was a net increase of 271 mortgages, or 12%, to 2,561. That followed a net increase of 260 in May.
Among large loans added to special servicing recently were a $157 million mortgage on Southfield Town Center in Southfield, Mich.; a $141 million loan on a retail portfolio controlled by a Developers Diversified Realty partnership; a $130.1 million mortgage to a DLJ Real Estate Capital Partners partnership on six hotels, encompassing 1,159 rooms, in California and Oregon; a $98.7 million mortgage to Educational Realty on nine student-housing properties, encompassing 1,073, in six states; and a $90 million mortgage to Millennium Partners on the 277-room Four Seasons San Francisco hotel.
The special-servicing rate compiled by Trepp dates back to 1998, when an industry standard for the reporting of CMBS data was implemented.
CMA explains there is often a time lag before transfers to special servicing are reported. Transfers are disclosed in monthly reports issued by servicers on varying schedules. So a transfer counted in June may have actually occurred three or four weeks earlier.
How the Fed will choose bonds is being closely watched in the $700 billion market since eligible debt is likely to garner the highest prices.
The Fed intends to begin its program for newly-issued CMBS this month, and then later accept older bonds that are weighing on bank balance sheets.
"We anticipate having everything up and running in short order," says Tom Fink, a senior vice president at Trepp.
By increasing demand for commercial bonds, TALF could lower borrowing costs to levels that make it attractive to originate new loans.
Lack of financing is seen contributing to a sharp rise in defaults on office, retail and apartment buildings that are faced with balloon payments when loans mature. It is worsening impact on property values from the U.S. recession, which is pinching the property revenue needed to service the debt.
The TALF program has lowered costs for some consumer debt, such as credit card and auto loans.
Reuters reports TALF for CMBS will probably not see its first new issue until July or August since lenders have had little time to originate, package and market loans, a trader at Citigroup Inc. said last week.
Trepp, whose data covers nearly 100 percent of the U.S., Canadian and European CMBS markets, won the contract after a competitive bidding process. Terms were not disclosed.