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So, CMBS statistics on
delinquency continue to
worsen at a rapid pace.
There has been a dramatic
increase in specially
serviced loans. According to
Deutsche, 1,363 loans ($12.9
billion) are in special
servicing versus 656 ($4.6
billion) one year ago. The
report states that prior to
October 2008 400+ CMBS loans
per month where being
refinanced, the number is
now below 100 per month and
falling. Fortunately, the
amount of maturing CMBS
loans is moderate compared
to the previous few years of
loan origination. However,
what will be of great
concern in the next few
years is the amount of risky
five-year interest-only
loans made during bad
vintage underwriting years,
to some extent 2005, but
especially 2006 and 2007.
Deutsche reports $15 to $25
billion of five-year
interest-only loans coming
due in each 2010, 2011 and
2012. Time, amortization,
and leverage minimizes the
risk of maturity defaults.
Much of this shorter
maturity interest-only
product was done at high
leverage levels. Assuming
that the refinance market is
not available for loans in
excess of 70% loan-to-value
(perhaps even an aggressive
assumption), Deutsche
reports that 45% of the
$18.8 billion loan volume
maturing in 2009 would not
qualify for refinance. In
the same analysis two-thirds
of the $154.5 billion in
maturing loan balances
between 2009 and 2012 would
not be refinanceable.
Some argue that the
commercial real estate
markets will recover quickly
as the economy begins to
recover, which will resolve
much of the refinancing
problem. However, Deutsche
made an ominous conclusion
to its report, "We disagree
- even if rents and vacancy
rates improve, the vast
majority of the price
declines reflected changes
in underwriting regimes, not
depressed cash flows." We
know that unemployment will
continue to lag an economic
recovery and that puts
stress on consumer spending,
which directly or indirectly
effects every sector of
commercial real estate. If
the banks and other
financial institutions are
starting to recover, will
they really want to load
their balance sheets with
more commercial real estate,
at least the type and
leverage points most needed?
All eyes seem to be focused
on the government.
These programs should
provide incentive to create
an environment that replaces
fear with risk taking. A
good example is the Public
Private Investment Plan ("PIPP"),
which was designed to
acquire troubled loans and
other assets from financial
institutions. Interestingly,
Jamie Dimon of JP Morgan
said last week, "We're
certainly not going to
borrow from the federal
government because we've
learned our lesson about
that." Mr. Dimon was quoted
saying taking TARP money was
the equivalent of a "scarlet
letter" and the company is
anxious to repay the funds.
Repayment would also free
the bank from compensation
restrictions and other
oversight that was tied to
the bailout money.
Furthermore, he doesn't feel
his company needs it. JP
Morgan bought $34 billion in
mortgage-backed and
asset-backed securities in
the first quarter without
PIPP. However, he also said,
"But I do think that if PPIP
is properly executed, it
could be good for the system
because it could give some
prices to certain loans and
help some companies do
things they might not
otherwise have been able to
do." Last week President
Obama described the new
economy as "Proud, sturdy,
and unwavering in the face
of the greatest storm." Mr.
President, in the commercial
real estate market winter
storm warnings have just
been issued and for those in
the industry, it's getting
very chilly out there. |
