CMBS Loan Values Down in 2015 Due to Higher Rates

The price of the loans underlying commercial mortgage-backed securities declined 210 basis points during 2015, amid a broad rise in interest rates, according to DebtX.

The estimated price of the whole loans securing the CMBS universe was unchanged from November to December at 97.6%.

"CMBS loan prices dropped 210 basis points primarily due to a rise in interest rates across the yield curve and a widening of market spreads across all collateral types," Will Mercer, managing director of the Boston company, said in the release.

DebtX priced $900 billion of commercial real estate loans that collateralize U.S. CMBS trusts through the end of December, according to a Monday news release.

The median adjusted loan-to-value ratio increased to 58% in December, the median debt service coverage ratio increased to 1.47 and the median estimated loan yield rose to 4.6%.

November S&P Summary

• It was a relatively quiet month in U.S. equities. U.S. large-cap dispersion fell modestly in November to 5.6% as it continued to move within a tight range. U.S. small-cap dispersion remained high even in comparison to longer-term averages.

• A similar picture held across most developed markets; the exception was Australia, which has seen its equity markets battered by external forces in recent months. This month, a return to bearish form in commodities saw dispersion in the S&P/ASX 200 rise to its highest levels in two years; correlations also rose in a month of relatively elevated volatility 'down under.'

• Excepting Australia, correlations were largely unchanged across our developed benchmarks and declined (along with volatility) in China and the S&P Emerging BMI.

CMBS delinquencies edge up in October

The delinquency rate on commercial-mortgage backed securities jumped slightly in October, but the story continues to be that bubble-era loans backing CMBS are being refinanced and paid off, Morningstar Credit Ratings reported.

The delinquency rate increased two basis points to 3.51 percent, but remains 64 basis points below the level of one year ago, Morningstar reported.

Analysts have been concerned about a wave of highly leveraged loans in CMBS that were originated during a period of looser standards between 2005 and 2007.

In its latest surveillance report, however, Morningstar said that the principal balance of CMBS declined by $9.97 billion in the month, an indicator that payoffs on 2005-to-2007 era loans are picking up.

The delinquent balance fell to $27.67 billion in October, down 13.6 percent in one year, Morningstar reported.

Commercial Real Estate Property Brokers Experience Profit Drop as Market Slows Down

Commercial Property companies are starting to experience decrease in their profits as the commercial real estate market start to lose its heat.

According to Bloomberg.com, CBRE Group Inc. and Jones Lang LaSalle Inc. experienced their biggest loss since 2011 due to difficulties in equities. The loss brought a 14% drop for CBRE Group and 16% for Jones Lang LaSalle. HFF Inc. dropped with 20% in August while Marcus & Millichap Inc. dropped with 17%.

The possible further decrease in real estate transactions is raising concern among big brokerage firms that their profit will also decline together with the transactions. The possible drop in profit might cause for the firms to lease their properties instead of selling them.

Brad Burke, analyst at Goldman Sachs Group Inc., said that the profit growth at the companies "is in the rear- view mirror at this point. This is a natural maturing of the real estate cycle."

According to Real Capital Analytic Inc., commercial real estate transactions in the U.S. increase with 23% during last year's second quarter. Major several sales made early last year had "front- loaded" the first half volume of $255.1 billion. Two industrial portfolio were included in the transaction, namely Manhattan's Waldorf Astoria Hotels and Willis Tower in Chicago.

Sam Chandan, founder and chief economist of Chandan Economics, said that "We have had a very rich transaction market for some time, so the rate of growth in activity has necessarily begun to taper off. It's not the kind of growth we saw when we were coming off the bottom."

According to ChicagoBusiness.com, a quarterly report from Federal Reserve Data revealed that "the expansion in real estate lending is slowing." A 2.7% increase in outstanding commercial- mortgage debt in 2013 was observed and it raised again by 4.2% last year.

Various factors affect the slowdown in commercial property market business. Some of those factors were a strong dollar's effect non- U.S. profit, drop in oil prices that causes decrease in real estate demand "energy hubs" such as Calgary and Houston.

Commercial real estate market getting overpriced

The commercial real estate market is shifting to an overpriced market, especially for core properties in the top markets, said real estate research firm Situs RERC, in a second-quarter report issued Tuesday, August 18, 2015.

“In the previous cycle (that ended in 2008), prices increased over true values by more than 50%, and it would not be surprising to see something similar in the current cycle,” the report said.

Commercial real estate transaction volume rose 23% for the year ended June 30, the report said, citing data from research firm Real Capital Analytics. Prices increased on a year-over-year basis for four out of five property types: up 10% for the industrial sector, 11% for both retail and apartments, and 19% for the hotel sector. Office prices were flat during the period.

Overall, commercial real estate value was higher than property prices in the second quarter, with a rating of 5.2 on a scale of 1 to 10, with 10 indicating excellent value compared to the price. Apartment and hotel sectors are somewhat overpriced with price ratings below 5, with apartments at 4.6, the same rating as in the first quarter and the second quarter of 2014, and hotels at 4.8, down from 5.4 in the first quarter and 5.7 in the second quarter of 2014. Retail was the only sector with an increased value vs. price rating in the second quarter, up to 5.5 from 5.1 in the first quarter and 4.9 in the second quarter of 2014.