Dead on Arrival: Geithner's Plan Can't Stop The Tidal Wave of Commercial Mortgage Maturities
2005 is coming, and nobody can stop it. Like a giant flock of boomerangs, the mortgages originated during the boom years of 2005-2007 are returning home, and the bankers are already struggling to keep up with all the arrivals.
Approximately 80% of new 2008 loans were originated simply to refinance existing maturing mortgages, compared with just 35% from 2000 through 2007. This trend will only increase as record numbers of 2005-2007 vintage commercial mortgages begin to mature in 2010.
In 2009 alone, Foresite Analytics estimates that $250 billion of commercial and multifamily mortgages will mature. This is an all-time high for the real estate debt industry, but the record won't last long. Over the next two years, $594 billion of commercial real estate loans will mature as aggressively underwritten 2006 and 2007 vintage loans come due. That is on top of $220 billion of multifamily mortgages scheduled to mature:
Many equity investors are likely to get wiped out in the tempest that will ensue when these loans mature, and I wrote about the math behind this certainty in The Coming Bust in Commercial Real Estate: Why Developers Are Desperate For the Dole. That post illustrated how a building worth $100 million at the peak is only worth $74 million now, but a 36% decline in value may be the best one could hope for these days. Yesterday, Bloomberg reported that lenders believe the value of the Hancock Tower in Boston may have declined by 50%
The commercial real estate market is now in a full-fledged tail spin. According to Real Capital Analytics, U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year-over-year. The reason is that $1.8 trillion of loans were originated in the U.S. between 2000 and 2007, with the most rapid growth taking place in 2005, 2006 and 2007. Roughly half of that debt was originated during 2004 and 2008, some of the worst years in terms of deterioration in underwriting standards. That debt is starting to come due right now, and there may not be enough new lending capacity to absorb it all.
Many lenders are playing a game of hide the weenie by automatically granting one-year extensions on maturing loans in the hopes that debt markets will miraculously recover in 12 months. This has been almost standard procedure in the CMBS market, where maturing loans are being extended and placed into special servicing at ever increasing rates:
Source: Costar
These loan extensions are only adding to the pressure in 2010, and 2011 is shaping up to be a potentially seminal year in the world of commercial real estate. “If values have rebounded sufficiently by then, the market could avoid widespread defaults. But if the market is still depressed, a significant amount of these maturities could go into default,” said Foresight partner Matthew Anderson.
The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent by 2010. This is bad news for lenders, but even worse news for property owners who overbought at the peak. In addition to that pesky refinancing issue, most are already wrestling with the recession and rising vacancy rates, lower demand and decreasing rents.
But the significantly lower commercial lending volumes are much, much worse than decreasing rents. Combined with rising cap rates and tougher underwriting standards, many property owners will be left out in the cold when it comes time to refinance. If the value of the Hancock Tower in Boston has fallen by 50%, which seems likely, Broadway Partners and Lehman Brothers, the equity investor and mezzanine lender, respectively, are now completely wiped out. So much for location, location, location.
Disclosures: None
mortgage reits
commercial mortgages,
commercial+real+estate,
commercial real estate loans
Approximately 80% of new 2008 loans were originated simply to refinance existing maturing mortgages, compared with just 35% from 2000 through 2007. This trend will only increase as record numbers of 2005-2007 vintage commercial mortgages begin to mature in 2010.
In 2009 alone, Foresite Analytics estimates that $250 billion of commercial and multifamily mortgages will mature. This is an all-time high for the real estate debt industry, but the record won't last long. Over the next two years, $594 billion of commercial real estate loans will mature as aggressively underwritten 2006 and 2007 vintage loans come due. That is on top of $220 billion of multifamily mortgages scheduled to mature:
Many equity investors are likely to get wiped out in the tempest that will ensue when these loans mature, and I wrote about the math behind this certainty in The Coming Bust in Commercial Real Estate: Why Developers Are Desperate For the Dole. That post illustrated how a building worth $100 million at the peak is only worth $74 million now, but a 36% decline in value may be the best one could hope for these days. Yesterday, Bloomberg reported that lenders believe the value of the Hancock Tower in Boston may have declined by 50%
The commercial real estate market is now in a full-fledged tail spin. According to Real Capital Analytics, U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year-over-year. The reason is that $1.8 trillion of loans were originated in the U.S. between 2000 and 2007, with the most rapid growth taking place in 2005, 2006 and 2007. Roughly half of that debt was originated during 2004 and 2008, some of the worst years in terms of deterioration in underwriting standards. That debt is starting to come due right now, and there may not be enough new lending capacity to absorb it all.
Many lenders are playing a game of hide the weenie by automatically granting one-year extensions on maturing loans in the hopes that debt markets will miraculously recover in 12 months. This has been almost standard procedure in the CMBS market, where maturing loans are being extended and placed into special servicing at ever increasing rates:
Source: CostarThese loan extensions are only adding to the pressure in 2010, and 2011 is shaping up to be a potentially seminal year in the world of commercial real estate. “If values have rebounded sufficiently by then, the market could avoid widespread defaults. But if the market is still depressed, a significant amount of these maturities could go into default,” said Foresight partner Matthew Anderson.
The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent by 2010. This is bad news for lenders, but even worse news for property owners who overbought at the peak. In addition to that pesky refinancing issue, most are already wrestling with the recession and rising vacancy rates, lower demand and decreasing rents.
But the significantly lower commercial lending volumes are much, much worse than decreasing rents. Combined with rising cap rates and tougher underwriting standards, many property owners will be left out in the cold when it comes time to refinance. If the value of the Hancock Tower in Boston has fallen by 50%, which seems likely, Broadway Partners and Lehman Brothers, the equity investor and mezzanine lender, respectively, are now completely wiped out. So much for location, location, location.
Disclosures: None
mortgage reits
commercial mortgages,
commercial+real+estate,
commercial real estate loans
Labels: commercial mortgages, commercial real estate, Commercial Real Estate Debt, commercial real estate loans
posted by REIT Wrecks at
11:02 AM
5 Comments:
Many of these loans also have loan-to-value ratio and anchor tenant requirements that may kick them into technical default when vacancy rates rise and appraised values drop. The lenders can then require additional capital or collateral or foreclose on the property. They may not want to of course, but many of these loans will almost definitely be in default.
Additionally, the lock-box provisions in these loan documents allow the lenders to take as much of the rent as necessary to service the debt, potentially leaving owners with zero cash flow.
Any ideas on how to play this in the securities markets? Is there a way to short the most vulnerable tranches of CMBS? I'm already buying SRS, but it seems like there should be a more direct way to play this.
Lehman was not the mezz lender; they were Five Mile and Normandy. And the value of the Hancock Tower did not decline by 50%. This was a case of "loan-to-own" by the mezz lenders, who entered into the transaction with the option to assume the first lien mortgage if the first lien borrower defaulted as they did.
Oops I take that back; I wasn't familiar enough with what happened. Lehman was indeed one of the mezz lenders. the new guys bought out their right to assume the first lien mortgage for peanuts. well done, five mile.
Curt - I get a lot of emails vis a vis more direct short plays, and I don't know of any other than the CMBX or SRS. You could short IYR, but remember that REITs on average are trading about 40% of NAV, with implied cap rates of +/- 9%, which is roughly 200 bps below the private market in terms of valuation. REITs typically presage a recovery in the private market, and the bad news on commercial real estate valuations is getting stale. It's tough to be be a bull now, but no matter what your bias is, you need to be nimble.
Mike - related to the above, Five Mile could use some good news. They are one of Cerebrus' majority partners in the GMAC deal - and they can kiss that bit of their portfolio goodbye.
The Hancock deal was a much better deal though, although it implies very bad things for CRE valuations. As you know, Five Mile/Normandy bought the mezz from LEH et al, foreclosed on the Broadway Partner ownership interests and assumed the first. This got them first mortgage financing at about 97% LTV, which is totally off market. If you were to buy this deal with market financing, LTVs would be 80% max, more likely 65%, which implies further that this building would have traded even lower in an open market deal.
C'mon man, I know you have a post in you!
A post I can handle, an article, no, unless you want a diatribe about how stupid the TALF/PPIP plan is.
you say: "this building would have traded even lower in an open market deal". The only thing this deal says is that you can do very well buying "loan-to-own" mezz debt at foreclosure auctions. That is not the same thing as "the open market" so you can not say that this implies that office CRE is down 50% or more. It may well be true that it is, but we won't know that until some other major office delinquencies get refi'ed in the open market (e.g. 220 North Lasalle in Chicago)
Post a Comment
Links to this post:
Create a Link
<< Home