Job Growth, Funding Key Factors in CMBS Refinance

MBA (10/7/2008 ) Murray, Michael
Borrower access to capital and job growth rates raised concerns about delinquencies and refinance capabilities for commercial mortgage-backed securities.

“It is taking borrowers longer to find financing,” said Tricia Hall, managing director at Barclays Capital, New York, speaking in a CMSA quarterly webast. “We are in an ever changing landscape that is not something that I am going to pretend has stabilized at this point.”

Mark Peterson, director of Principal Real Estate Investors, Des Moines, said his firm remains “pleasantly surprised” at the ease of refinance during the first three quarters of the year, but it has other concerns.

“Our bigger concern is with the changing landscape in the last few weeks, especially at regional banks and institutional lending going forward now, is what kind of run rates do we expect as far as loans getting refinanced,” Peterson said.

Despite available funding sources, Peterson said he was concerned if borrowers could access those funds because the industry will need to refinance nearly $23 billion in CMBS in 2009.

“The one potential bright spot is that we have heard from different sources that there is money being put together in different fund formats to help fill the void that conduit lenders left behind,” Peterson said. “The spreads for those types of lenders are going to be much wider than what borrowers were used to during the conduit days. The risk is going to be if there is enough capital there to support the cost of funds going forward from these sources of money.”

Mark Warner, managing director at Black Rock, New York, said the next couple of months will rely not only on recently passed legislation—the Emergency Economic Stabilization Act of 2008—but job growth. He said CMBS now falls beyond “technicals” of deleveraging, lack of liquidity and losses of certain counterparties to national job losses and locations for aggregate demand.

The Bureau of Labor Statistics reported unemployment remained at 6.1 percent for August, but 159,000 jobs were lost. The Conference Board Employment Trends Index continued its decline in September, suggesting even more losses to come in the labor market. The index fell in September to 108.4, down 0.8 percent from the August revised figure of 109.3, and down nearly 10 percent from a year ago.

“If we only go from 6 percent unemployment to 7 percent, we will be far better off than if it starts to creep higher,” Warner said.

“There is no capital here available at 11 [percent] and 12 [percent] to refinance the balloon,” Peterson said. “The term risk is real here, but servicers are going to be more apt to work with borrowers, and lower supply in the market will help restrain vacancies and rents going down too far. To see defaults going to where the market is currently pricing, it seems like there are two or three steps you have to take before that actually occurs.”

Fitch Ratings, New York, said nearly half of all CMBS delinquent loan balances were from top five CMBS delinquent states, including Texas with a 16.5 percent rate, Florida and Michigan at 11 percent, Georgia at 5.3 percent and Ohio with 4.8 percent delinquencies.

“Just mathematically, [delinquencies] have to increase because there has been no new issuance this year,” said Susan Merrick, managing director at Fitch.

The Mortgage Bankers Association reported CMBS delinquencies 30 or more days delinquent or in REO were up to .53 percent after the first half of the year, up from .40 percent at the end of the first quarter, based on unpaid principal balance of loans.

Fitch showed CMBS delinquencies for 60 or more days up to .44 percent in August from .33 percent at the end of March.

“We will have a better estimate of the direction of the economy and the magnitude of the recession in the next couple of months to have a better idea about the magnitude in the rise of delinquencies," Merrick said. "You should anticipate tremendous increases in defaults just because of economic conditions. At the moment, overall, while we are not comfortable with tremendous uncertainty in the market, we do think that commercial real estate has performed very well and is not, at the moment, on the precipice of a tremendous decline in performance.”

Warner said CMBS remains healthy despite negative headlines and has until 2010-2011 for properties to grow into a refinancing size they would face at their balloon date.

“Delinquencies are certainly going to rise,” Warner said. “They are at a very low rate, and I am sure there will be negative press—delinquencies are going to triple and get back to where they were in 2002 or early 2003. It is still a very low absolute level even though the level will have gone up.”