Headlines

“Nearly Half of Commercial Mortgages that Mature in 2011 are Underwater”

As I was inputting this week’s Monday’s Numbers data, I  re-read last week’s headline, and finding it both disturbing and unnerving, went back and re-read the Trepp LLC underlying study. The following are what I saw as the key takeaways from the report:

  • Approximately one-half of the estimated $346 billion of commercial real estate mortgages maturing in 2011 have principal balances in excess of their market value!
  • An estimated 63 percent of the $360 billion of commercial real estate mortgage loans currently held by commercial banks, insurance companies, and CMBS trusts maturing in 2012 have principal balances in excess of their market value!
  • This percentage declines slightly in 2013, to 61 percent of $367 billion of loans maturing in 2013 and to 55 percent of  the $339 billion of loans maturing in 2014. Rounding out the first half of the current decade, Trepp estimates 75 percent of commercial real estate mortgages maturing in 2015 will have principal balances in excess of their market values.

What these numbers tell me is that acquisition of loans sold by financial institutions and supplying “rescue” capital to financially upside down borrowers will be among the most profitable “high risk” commercial real estate investment strategies for the foreseeable future. 

Monday’s Numbers

The Commercial Mortgage Alert Trepp weekly survey (below) of 15 active portfolio lenders came in five to six basis points during the survey period, most likely in response to 10-year Treasury bonds widening approximately 30 basis points during the period.

Asking Spreads over U.S. Treasury Bonds in Basis Points

(10-year Commercial and Multifamily Mortgage Loans with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

7/1/11

Office

342

214

181

Retail

326

207

173

Multifamily

318

188

163

Industrial

333

201

168

Average Asking Spread

330

203

171

10-Year Treasury

3.83%

3.29%

3.18%

The Cushman & Wakefield Sonnenblick-Goldman Survey for the period ended July 7 showed fixed and floating rate spreads remaining unchanged in most property sectors during the survey period with financing remaining available at attractive and affordable rates.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage

Spreads For 5 Year Commercial Real Estate Mortgages

12/16/10

3/31/11

6/2/11

6/16/11

7/7/11

Multifamily – Non-Agency

+270

+245

+225

+230

+230

Multifamily – Agency

+280

+250

+200

+210

+220

Regional Mall

+280

+260

+255

+265

+265

Grocery Anchored

+280

+260

+245

+250

+250

Strip and Power Centers

 

 

+265

+270

+270

Multi-Tenant Industrial

+270

+265

+245

+255

+260

CBD Office

+280

+260

+250

+255

+260

Suburban Office

+300

+270

+260

+270

+270

Full-Service Hotel

+320

+300

+265

+275

+285

Limited-Service Hotel

+400

+325

+300

+310

+310

5-Year Treasury

2.60%

2.23%

1.62%

1.52%

1.64%

Source: Cushman & Wakefield Sonnenblick Goldman.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage

Spreads For 10 Year Commercial Real Estate Mortgages

12/1610

3/31/11

6/2/11

6/16/11

7/7/11

Multifamily – Non-Agency

+190

+180

+180

+185

+185

Multifamily – Agency

+200

+185

+170

+175

+180

Regional Mall

+175

+180

+180

+190

+190

Grocery Anchor

+190

+185

+175

+200

+200

Strip and Power Centers

 

 

+190

+195

+195

Multi-Tenant Industrial

+190

+190

+185

+190

+190

CBD Office

+180

+180

+180

+190

+190

Suburban Office

+190

+190

+190

+195

+195

Full-Service Hotel

+290

+230

+220

+225

+235

Limited-Service Hotel

+330

+260

+240

+245

+250

10-Year Treasury

3.47%

3.45%

2.99%

2.94%

3.09%

Source: Cushman & Wakefield Sonnenblick Goldman.

Property Type

Mid-Point of Floating-Rate Commercial Mortgage

Spreads For 3 – 5 Commercial Real Estate Year Mortgages*

12/16/10

3/31/11

6/2/11

6/16/11

7/7/11

Multifamily – Non-Agency

+250-300

+225-325

+200-275

+200-260

+200-250

Multifamily- Agency

+300

+250-310

+220-270

+220-260

+220-260

Regional Mall

+275-300

+225-300

+205-275

+205-270

+205-270

Grocery Anchored

+275-300

+225-300

+215-285

+205-275

+205-275

Strip and Power Centers

 

 

+235-300

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+250-350

+230-325

+230-325

+230-325

CBD Office

+225-300

+225-300

+215-300

+215-300

+215-300

Suburban Office

+250-350

+275-350

+250-325

+250-325

+250-325

Full-Service Hotel

+300-450

+350-450

+350-450

+350-450

+350-450

Limited-Service Hotel

+450-600

+400-500

+400-500

+400-500

+400-500

1-Month LIBOR

0.26%

0.22%

0.19%

0.19%

0.19%

3-Month LIBOR

0.30%

0.28%

0.25%

0.25%

0.25%

* A dash (-) indicates a range.

Source: Cushman & Wakefield Sonnenblick Goldman.

Year-to-Date Public Equity Capital Markets

DJIA (1): +9.33%
S & P 500 (2):+6.85%
NASDAQ (3): +7.80%
Russell 2000 (4):+8.83%
MSCI U.S. REIT (5):+13.05%
_____
 (1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index. (4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/10

7/8/2011

3-Month

0.12%

0.02%

6-Month

0.18%

0.06%

2 Year

0.59%

0.39%

5 Year

2.01%

1.50%

10 Year

3.29%

3.03%