CMBS Delinquencies Unchanged in March as Loan Liquidations Remain Low

Trepp, LLC, the leading provider of information, analytics, and technology to the CMBS, commercial real estate, and banking markets, released its March 2015 US CMBS Delinquency Report today.

The Trepp CMBS Delinquency Rate was unchanged in March, interrupting the recent string of falling delinquencies. After falling for four consecutive months, the delinquency rate for US commercial real estate loans in CMBS remains 5.58%. The percentage of seriously delinquent loans, defined as those 60+ days delinquent, in foreclosure, REO, or non-performing balloons, fell one basis point to 5.41%.

Almost $1.1 billion in CMBS loans became newly delinquent in March, bringing total delinquencies to $29.4 billion, slightly below the total as of month-end February. Over $800 million loans were cured last month, while $570 million loans that were previously delinquent paid off either at par or with a loss.

The decline in the pace of loan resolutions does not come as a surprise. After a torrid pace in 2012 and 2013, liquidations have slowed for the time being. As the market gets further into the cycle of 2006 and 2007 10-year loans reaching their maturities, Trepp expects liquidation volume numbers to start to pick up again.

"The financial markets were turbulent in March, but the CMBS market remained a sea of tranquility," said Manus Clancy, Senior Managing Director at Trepp. "While market watchers were worried about lower US GDP, an overly strong dollar, and sagging corporate earnings, the CMBS market was as steady as could be. Spreads remained largely unchanged in March, new issuance was solid, CMBS volatility was light, and the delinquency rate was flat. That performance compared to the big whipsaws in US stock prices seemingly each day in March."

Why Chinese companies rush to buy Manhattan's commercial property

Chinese investors' rapidly growing appetite for high-profile U.S. commercial properties has been highlighted as China's Anbang Insurance Group Co., the buyer of luxury hotel Waldorf Astoria, has agreed to buy 21 floors of an office building on the famed Fifth Avenue in Manhattan, New York City, recently.

The coveted building is located at 717 Fifth Avenue on East 56th Street. Anbang will buy it from Blackstone Group, the leading U.S. private equity firm. The cost would be between 400 million to 500 million U.S. dollars. It is said that Anbang would only buy the office portion, which starts from floor 5 to 26. The first four floors for retail are not included.

This Chinese insurer has made headlines with the acquisition of Waldorf Astoria, the landmark hotel on Park Avenue last October. Under the agreement, Anbang purchased the iconic luxury hotel for 1.95 billion dollars from Hilton Worldwide Holdings.

Anbang Insurance Group Co. is one of China's comprehensive group companies in insurance business. According to corporate sources, Anbang has been developing stably and reached a total asset of 800 billion yuan (about 130 billion U.S. dollars).

Anbang is not alone. Other Chinese companies are also caught in the craze of buying into Manhattan commercial real estate, which is regarded as a "safe heaven."

In June 2013, the family of Zhang Xin, chief executive officer of Chinese real estate developer Soho, together with a Brazilian partner bought a 40 percent stake in General Motors Building for about 700 million dollars. Shanghai-based Fosun International Ltd. bought the One Chase Manhattan Plaza, the landmark building of lower Manhattan in December 2013 from J.P. Morgan Chase & Co. for a consideration of 725 million U.S. dollars.

Also, the Bank of China reached a deal in December to buy a Manhattan office tower for nearly 600 million dollars.

Chinese companies believe that they could achieve stable returns from the U.S. commercial real estate. "Given the strong performance in the past, the group intends to realize long-term stable investment return by investing in high quality real properties in North America. Going forward it will increase the share of overseas assets in asset allocation, taking Europe and North America as priority areas," Anbang said after its Waldorf acquisition.

The recovering of U.S. economy has boosted the rents and transactions of office buildings, especially in big cities like New York. And foreign buyers are going after top-of-the-line properties in Manhattan.

The New York City property investment sales market saw 442 deals close last year, shattering the previous record of 346 deals in 2007. The year of 2014 was also the second most active year in terms of dollar volume, with 39.8 billion dollars in business volume, second only to the 48.5 billion dollars struck in 2007, according to a report of Jones Lang LaSalle, a real estate consulting company.

Looking forward, "foreign capital is likely to continue to aggressively pursue opportunities, seeking long-term capital appreciation in what is viewed as the world's largest and most stable market. The dollar is also rising against major currencies. Dividends and future sale prices will be exchanged in appreciated dollars to foreign investors. With many local private market and private equity funds also actively looking for new properties, there will be no shortage of demand for Manhattan office buildings, " Commercial Real Estate service company Colliers International said in a recent report.

For many Chinese companies, overseas investment is also a kind of asset allocation diversification. Anbang said it has developed a well-structured global strategy to seize the opportunities brought by economic globalization and deliver services to customers around the world following their steps of "going global. "

Credit Suisse California Hotel CMBS Marks First Deal in 6 Years

Credit Suisse Group AG sold its first commercial-mortgage bond since 2008 with a $187 million deal tied to two beach-front hotels in Santa Monica, California.

Switzerland’s second-biggest bank is reentering the market as a surge in sales attracts new entrants, sparking concern lenders are loosening standards amid the competition. Credit Suisse’s last deal was an $887 million transaction in March 2008, according to data compiled by Bloomberg, three months before the market for securities tied to properties from skyscrapers to shopping malls shut down for more than a year in the wake of the financial crisis. 

Wall Street banks are poised to issue more than $100 billion of the debt in 2014 after sales doubled to $80 billion last year, Bloomberg data show. Loans contained in deals sold this year are “substantially weaker” than those backing transactions issued in 2013, Barclays Plc analysts said in a report this month. About $8.4 billion in CMBS has been offered since January.

Almost one-quarter of mortgages in 2013 offerings are based on incomes that are at least 10 percent higher than landlords reported during the previous 12 months, Barclays analysts led by Keerthi Raghavan said in the Feb. 7 report. So-called pro-forma underwriting allowed property owners to pile on more debt during the boom years leading up to the property market crash in 2008 on the assumption that future earnings would be higher.
New Department Zurich-based Credit Suisse, which tried to rebuild its origination team in 2011, fired 50 people in October of that year without completing a deal as Europe’s sovereign debt crisis roiled credit markets. The bank restarted the group again last year.

The lender, ranked by newsletter Commercial Mortgage Alert as the fifth most-active underwriter of CMBS globally when issuance peaked in 2007, is taking a cautious approach to new deals by avoiding the types of transactions that require lenders to hold as much as $1 billion of mortgages on their books for months, according to people with knowledge of its strategy.

This week’s transaction is backed by a mortgage linked to the Shutters on the Beach and the Casa Del Mar in Santa Monica, California, according to Morningstar Inc. Top-ranked securities maturing in seven years were sold to pay 85 basis points, or 0.85 percentage point, more than the one-month London interbank offered rate, according to a person familiar with the sale who asked not to be identified because terms aren’t public.

The Shutters on the Beach and the Casa Del Mar are the only two beachfront properties in Santa Monica, Morningstar said in a report earlier this month. In 2009, during the depths of the recession, revenue at the properties dropped about 19 percent, compared with a decline of 35 percent for comparable hotels, according to Morningstar.

Hotels are one of the most volatile commercial-property types as changes in the economic climate affect them almost immediately with rates resetting every night. In addition to the $183 million mortgage, the properties are carrying $186 million of mezzanine loans, according to Morningstar.

Fitch: U.S. CMBS New Issue Metrics Worsen; Legacy Metrics Improve

The road continues to diverge between new issue and legacy metrics for U.S. CMBS, according to Fitch Ratings in its latest quarterly index report.

New issue metrics continue to decline as the percentage of new issue full and partial interest-only (IO) loans in Fitch-rated transactions rose by five percentage points last quarter. The increase was driven by an approximately four-percentage-point increase in full IO loans. In addition, Fitch-stressed LTVs continued to edge up, while stressed DSCRs were lower.

Meanwhile, metrics of legacy U.S. CMBS improved. Delinquencies in Fitch-rated transactions fell in fourth quarter-2014 (4Q'14), though the rate of declines slowed. This was largely due to a backlog of REO assets, which comprised nearly two-thirds of the index balance. Furthermore, the percentage of loans in special servicing declined again in 4Q'14 to $25.1 billion.

'The wave of upcoming CMBS maturities will begin in 2015, particularly in the second half of the year,' said Managing Director Mary MacNeill. The majority of 2015 loan maturities for Fitch-rated, fixed-rate multiborrower CMBS ($21 billion) are set to come due in 2H'15. Roughly $12 billion comes due in 1H'15 ($3.5 billion in 1Q'15). The majority of the higher-leveraged, peak-vintage loans mature between 2016 and 2017, which totaled $129 billion at YE14, excluding $11 billion that already defaulted and remain outstanding.

Slippery Situation: Oil’s Potential Impact on Real Estate

While it’s certainly good news for the majority of consumers, the sliding cost of oil and gas could gum up the works for some real estate owners and investors.

With crude oil prices hovering around $50 a barrel since the beginning of the year, industry watchdogs are voicing concerns about the threats to particular real estate markets and CMBS transactions.

Oversupply and weak demand have pushed crude oil down more than 55 percent from its recent peak of $107 a barrel in June 2014. For the regions and commercial assets that are fueled by the petroleum industry—including parts of Texas, Colorado and North Dakota—sustained low oil prices could lead to vacancies and reduced property incomes, several real estate observers cautioned.

That, in turn, could bring on a new wave of delinquencies on highly leveraged properties, as well as increased volatility in high-yield bonds, some said.

“What people are most worried about is exposure to real estate markets with a lot of oil-services tenants,” Trepp Senior Managing Director Manus Clancy told Mortgage Observer in mid-January, noting that so far the impacts are largely theoretical.

“Upon re-leasing, the office tenants in those spaces would look to either give up space or spend less money,” he said. “Houston seems to be ground zero for that concern.”

Mr. Clancy said the submarkets at greatest risk are the oilfield “man camps” in West and South Texas and North Dakota’s Bakken shale region, where oil workers drill for fresh supply.

“These are places where there may be a couple of limited-service hotels and multifamily properties and everyone is there just to drill,” he said. “Those will be the first places to close up and die if oil remains in the $40 to $50 range.”

Jana Partners, an activist hedge fund that once held a major investment in the recently spun-off oilfield lodgings company Civeo Corp. sold its entire $51 million stake in the Houston-based firm on Dec. 30, 2014, regulatory filings show.

The New York-based fund dumped its 12 million shares after Civeo announced plans to severely cut its 2015 spending to between $75 million and $85 million, from $260 million and $280 million in 2014, as previously reported. Civeo plans to close sites and further reduce its North American workforce.

Civeo’s stock closed at $3.14 a share on Jan. 21, down from about $25 a share in October 2014. Representatives for Jana and Civeo declined to comment.

Several other Houston-based companies that specialize in oil and oil services, including Baker Hughes and Schlumberger, have announced budget cuts and layoffs. Overall, oil company analysts have said they expect 500 to 800 U.S. drilling rigs to come out of service in 2015, the Houston Chronicle reported in late December.

Likewise, CMBS deals backed by properties with heavy oil-related tenant bases could also take a hit if oil prices remain at a sustained low for several months or more, according to Trepp and other industry sources.

“For the Houston market, the concern is that if you just took out a $100 million loan on an office property where you have three big energy tenants, your grade-A tenants may start to look like grade-B tenants,” Mr. Clancy said. “If oil prices remain low, the securitizer may wonder, ‘Will they shrink their square footage? Will they go out of business?’ he added. “Nobody can say for sure what will happen to these guys, so that’s where all eyes will be.”

One prominent B-piece buyer who spoke at CRE Financial Council’s January 2015 conference in Miami Beach said that some recently issued securitizations for non-prime Texas developments are in jeopardy with oil and gas prices down. That buyer, who could not be named due to a strict conference policy on attribution, said those CMBS loans had been originated with high loan-to-value ratios and that the properties’ projected revenue streams relied on continued oil sector growth.

Now that that growth has been stymied, the panelist said he fears the loans may be headed to special servicing in the near future. That speaker and other industry representatives at CREFC declined to go on the record with their comments.

To be sure, others see the drop in oil prices as a minor concern in the context of a stable economy and rejuvenated real estate industry.

“The geographic diversity of other assets in multi-borrower deals will mitigate oil price exposure for CMBS,” Mary MacNeill, managing director of U.S. CMBS at Fitch Ratings, told Mortgage Observer.

There are no records of a single-asset securitized loan on a property in Texas, according to Fitch. However, the loan could still bring down the cash flow of securitizations that hold other mortgages.

“Vacancies in certain markets will rise over time if oil prices stay low for a more protracted period,” said Ms. MacNeill. “Particularly for office properties in Houston or other oil-dependent markets.”

The city of 2.1 million people, which is commonly referred to as the “energy capital of the world,” houses more than 5,000 energy-related firms, according to city government data.

Among several buildings in Houston that could be exposed are two office properties: Two Westlake Park at 580 Westlake Park Boulevard, owned by Houston-based Hicks Ventures, and Two Allen Center at 1200 Smith Street, owned by Brookfield Office Properties, loan documents provided by Trepp show.

Two Westlake Park is 80 percent leased to ConocoPhillips and BP, while Two Allen Center is 52 percent leased to U.S.-based natural gas and oil producer Devon Energy Corporation. Civeo is based in nearby Three Allen Center at 333 Clay Street, also owned by Brookfield.

The Devon Energy lease does not expire until 2020, which gives the space “minimal near-term exposure,” according to a Brookfield spokesperson.

“While Houston is considered a resource market, its economy is clearly more diversified now than it was during the ’80s and ’90s,” said Paul Frazier, head of the real estate giant’s Houston region. “Furthermore, the mid-stream and down-stream sectors of the energy space are also prominent in our economy, which gives us a hedge against lower commodity prices.”

Tom Fish, co-head of real estate investment banking in JLL’s capital markets group, also said that Houston’s economy and real estate market are adaptable enough to handle a shock to the oil industry.

“I don’t expect developers and projects to be going bankrupt or for there to be a string of foreclosures because of over-leveraged debt,” said Mr. Fish, who is based in Texas’ most populous city. “The capital markets for new development are efficient enough to withstand distress in the market,” he said. “I was here during the oil downturn of the ’80s and I don’t think we’re there again.”

Still, Mr. Fish said that there are concerns about the future of office and high-end multifamily properties in Houston with crude oil prices at such a low.

“Those have been the two most active sectors of construction in our city for the past few years,” he said. “If oil prices were to stay below $50 a barrel for several years, it would take its toll, but we are a long way from reaching a point where we see a lot of defaults.”

For the time being, low oil prices create a boon for retail companies, medical facilities, technology firms, and low- to moderate-income residences, Mr. Fish said.

“We’re a consumer-driven economy,” he told Mortgage Observer. “There’s no better way to turbocharge that than to put money back into consumers’ pockets.”