Commentaries

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from Rolfe Winkler:

Ugly CRE charts

From the Mortgage Bankers Association's Quarterly Data Book:

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The drought is (kind of) over!

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After months of buildup, Developers Diversified Realty Corp finally sells the first commercial real estate bond in more than a year. At $400 million, it’s hardly a dramatic debut, but it’s a significant first for one of the few markets still jammed since the financial crisis.

From Reuters:

Met with strong investor interest, Developers Diversified was able to price the deal below existing levels for the CMBS issues. Its $323 million AAA-rated five-year notes came at a narrower 1.4 percentage point premium to the five-year interest rate swap benchmark, or a yield of 3.807 percent, market sources said.

Commercial property borrowers falling short

Commercial real estate loan delinquencies are on the rise again, and September’s increase is the largest ever, according to Moody’s Investors Service’s latest tally of those loans included in CMBS deals.

Delinquencies stand at 3.64%, up from 0.54% a year ago and 0.41 percentage points higher than August. The hotel sector showed the biggest increase in late payments, up 0.79 ppt to 4.97%. The multi-family housing sector now stands at 6.09% – the highest of any property type.

Commercial real estate death watch – Capmark

What do you get when you put a U.S. automaker, a leveraged buyout and commercial real estate together – a soon-to-be bankrupt company. Caroline Humer of Reuters reports that that Capmark – formerly the commercial real estate business of GM financing arm GMAC – is teetering on the brink of bankruptcy, with the final blow coming possibly by the end of next week?

The company, which owns a bank that will continue to operate while it is in court, is in negotiations with lenders, bondholders and the Federal Deposit Insurance Company that will result in a filing by the end of October at the latest, the source said.

Bernanke’s Hester Street home

The Federal Reserve may not want to crow about the half-empty giant shopping mall it now owns in Oklahoma City by virture of its hastily-arranged rescue of Bear Stearns. But at least one other commercial real estate deal that the Fed picked up from Bear appears to be in better shape.

One loan now in the Fed’s portfolio is a mortgage Bear made to the developer of an upscale condominium building in lower Manhattan called The Machinery Exchange. The 14-unit complex at the corner of Hester and Baxter streets is located on the edge of Chinatown and got a favorable write-up from The New York Times in 2007 because of its architectural style.

German covered bonds under scrutiny

Fitch Ratings seems to be getting nervous about the amount of commercial real estate loans included in German banks’ covered bond pools.

The agency today affirmed 17 covered bond programs as part of a review, but kept nine German banks programs `under analysis.’ The rating firm now wants more information from the banks on the kind of real estate debt they use as collateral for their covered bonds.

from Rolfe Winkler:

Moody’s: CRE prices resume descent

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Last month commercial real estate prices took a bit of a breather, falling just 1% after seeing prices fall 9% from March to April and an additional 8% from April to May. Those are fairly stunning rates of decline. In July, the descent picked up steam again, falling 5.1% compared to June.

Commercial real estate prices...renewed steep declines and low transaction volume in July... The [Moody's/REAL Commercial Property Price Index] was down 5.1% from June after having declined by only 1% the prior month.  It is now 30.8% below what it was a year earlier and 38.7% below the peak measured in October of 2007.

A dark hour for CMBS

The last week has been a bit of a shocker for Europe’s already crumbling commercial mortgage-backed securities market (CMBS).
Investors have had to cope with steep declines in the value of their bonds and a wave of downgrades by rating agencies.

Now, to add insult to injury, there has been a jump in legal and structural issues. Bondholders are having their rights diluted over or taking on fresh liabilities they didn’t even realise they had.

The Re-REMIC limit

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The repackaging of commercial real estate mortgage-backed securities made a splash in July as banks offered investors panicked by looming ratings downgrades better protection against potential losses. But, it turns out that there’s only been 9 such deals rated by Moody’s, for a total of around $1.2 billion, with Credit Swisse doing three of them.

That’s not a huge amount for a $700 billion market and I suspect the reason is there’s just not that many natural buyers for the riskier, or junior, pieces that need to be sold in a re-REMIC. Repackaging doesn’t magically make the risk go away. What it does is split an existing tranche in two so one piece is better protected while the second is worse off. Who wants to buy the worse off piece when the outlook for commercial real estate is so awful.

Loans of concern

“Loans of concern” has the same ominous ring as the phrase “persons of interest” when uttered by law enforcement officials investigating a murder.

The corpse in this instance is the commercial real estate market, and Fitch Ratings has the latest indication of its morbid condition.

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