Monday, March 22, 2010

CRE & CMBS Market Analyses Summary

Several interesting market analyses have recently been published. Keep in mind that the focus of much of this is on institutional grade investment real estate. Your mileage and experience may vary.....

PricewaterhouseCoopers' Korpacz Real Estate Investor Survey: a survey of real estate investment trusts, pension fund advisers and private equity firms (all of which focus primarily on institutional quality real estate). They are investors in commercial real estate
  • CRE overall capitalization rates to hold steady during the next six months in 19 of 30 markets
  • Marketing time on properties further dropped in the survey as bidders turned out to purchase quality assets (emphasis added by ENSO)
  • Looming debt maturities remained a top-of-mind issue, and they believed out-of-balance loans coming due in the near term will present major hurdles for owners and lenders (and thus opportunities for investors)
  • Sales in 2010 will be slow (by historical standards) but that banks appeared more willing to lend than in 2009, even with very conservative underwriting and more equity needed to secure debt (ENSO comment: We have not observed this to be the case)
  • Vacancy rates in 2010 will increase but not as steeply as in 2009, and 2010 rental rates will decline in most markets, to a lesser degree than in 2009, as property visits and tenant interest show slight improvements (over 2009)

MBA 4thQ (2009) Commercial/Multifamily Delinquency Report: looks at commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities, life insurance companies, Fannie Mae and Freddie Mac. The MBA reports that “together these groups hold more than 80% of commercial/multifamily mortgage debt outstanding.”
  • From the third quarter to the fourth, the 30+ day delinquency rate on CMBS loans rose by 1.63% to 5.69%
  • The 60+ day delinquency rate on loans held in life company portfolios decreased by 0.04% to 0.19% [but remember: life companies actively "manage" possible future defaults by selling notes in advance of anticipated problems; and they quickly modify or foreclosure defaulted loans]
  • The 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae rose by 0.01% point to 0.63%
  • The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac increased by 0.04% to 0.15%
  • The 90+day delinquency rate on loans held by Federal Deposit Insurance Corp.-insured banks and thrifts rose by 0.49% to 3.92% [remember this: +50% of all commercial mortgage loans are held by this group]

Fitch’s report “CMBS Year End 2009 Servicing Update: Resolution Trends, Special Servicing Loan Volume & Staffing Levels”: Report focuses on CMBS loans that are rated\monitored by Fitch and that are in special servicing.
  • Specially serviced CMBS loans increased to $74 billion by the end of 2009, up from a $4.4 billion low at the end of 2007.
  • CMBS special servicers resolved nearly $8.7 billion last year
  • While CMBS servicers resolved more than 50% of loans in 2009 compared to 2008, a substantial increase in special servicing volume caused resolutions to fall from 31% to 11% last year
  • An 87% overall average recovery rate in 2008 dropped last year because of more distressed assets, lack of liquidity and declining property values (these means more subordinate CMBS bondholder classes were wiped out)
  • More than 50% of unpaid principal balance CMBS transferred to special servicing because of “imminent default” (i.e., not from a monetary or non-monetary default but from a foreseeable future default)
  • 75% of modified specially serviced loans were sent back to master servicers as performing or paid-in-full with nearly no losses

Fitch’s report on hotels states that CMBS loans rated by it and secured by hotels show no signs of slowing down:
  • A large concentration of hotel loans mature next year and in 2012
  • Projected delinquencies will double from current levels and by 2012 will hit 25% to 30% of all hotel loan balances in CMBS loans rated by Fitch (current hotel delinquencies stand at 16.6%)
  • More trouble is ahead: over 75& of floating-rate hotel loans originated during 2006 to 2007 mature in 2011 and 2012 into much higher fixed rates