The CMBS Delinquency Flood is Upon Us – Or is it?
For the last two years, those of us in the Real Estate Profession have been bracing ourselves for the forecasted tsunami of foreclosed properties hitting the market as a result of thousands of delinquent loans and loans maturing without any hope of being refinanced. So we braced ourselves for dropping valuations, lower rental rates, and higher vacancies.
Do you know what happened?
Hardly anything. The flood was more of a trickle, and the effect on prices, vacancies, and rental rates was minor. Banks renegotiated, or extended the loans to avoid a high volume of foreclosures at the last moment and most were relieved. Now, the experts are warning us again. Should we believe them? Here is the latest update.
In its latest CMBS Delinquency report, Trepp, one of the nation’s leading providers of CMBS and commercial mortgage data, warns of looming trouble. “The day of reckoning is here for the class of 2007 originated loans as the five year balloon loans that were made at the height of the commercial real estate bubble have begun to mature. The 2007 vintage was the weakest in terms of underwriting standards and it is widely expected that many of these loans will have trouble paying off at their balloon date. In total, about $15.5 billion of these loans will come due in 2012, with the majority reaching their balloon dates over the next six months.” Trepp goes on to report that so far 27 percent of 2007 vintage five year notes are in special servicing and 18.5 percent are currently 30 or more days delinquent.
Morningstar supports this bleak forecast. In their most recent report, they reported that delinquent unpaid balances for CMBS rose by $1.06 billion in October 2011, up to $61.27 Billion. The resulting delinquency ratio for October 2011 increased to 8.35% and is almost 30 times higher than the Morningstar reported low of .283% in June 2007. As a whole in October 2011, the distressed categories of 90+ day, foreclosure and REO increased in aggregate by $939 million.
So is Armageddon upon us?
Will REO properties flood the market and drive prices down? We’ll need to see. Many still believe that once again, the doomsday scenario is overblown. They site an abundance of private equity cash waiting to be deployed to purchase non performing notes, or provide bridge financing. Also, many feel that banks will remain hesitant to foreclose on any properties other then the absolute worst offenders.
Regardless of what 2012 brings us, I want to wish all of my clients, friends, and associates all the best for the coming year.