Also This Week in Captial Markets Report: KBS REIT III Ditching Debt Investments for Core Properties; Housing Moves Up with the Stock Market, By a Lot in Some Cases; and the Latest Loan Sales
The U.S. CMBS delinquency rate continued its steady decline last month as banks continue to take advantage of higher prices for commercial property and unload large REO dispositions, according to the latest index results from Fitch Ratings.
CMBS delinquencies should continue to move lower as commercial property assets become REO, are repriced and disposed of, Fitch noted. In fact, the percentage of REO assets in Fitch Ratings’ delinquency index exceeded 50% for the first time in the index’s history last month. This compares with 37% one year ago.
Share with Your Followers on Twitter
Retail property led resolutions last month with $454 million of CMBS delinquencies resolved, compared with $1.1 billion in total resolutions and $620 million in new additions to the index.
CMBS late-pays fell 11 basis points (bps) in September to 6.57% from 6.68% a month earlier. The drop was led by the sale of the Granite Run Mall, while the sale of another large troubled mall appears imminent.
The Granite Run Mall was previously the fourth largest loan in CMBS COMM 2006-C7 and represented 5.5% of the deal. The original $122 million loan to Macerich and Simon Property Group had been with the special servicer since October 2010 as inline occupancy at the Media, PA, mall struggled. The property became real estate owned via a deed in lieu in April 2011. The mall sold last month for just a little more than $24 million, which compares with total trust exposure on the asset of more than $128 million.
Meanwhile, Fitch Ratings awaits the sale of another troubled mall: Gwinnett Place in Duluth, GA. The asset represents the fifth-largest in MLMT 2007-C1, comprising roughly 4% of the deal. The $115 million, five-year loan to a majority-Simon-owned borrower made its way into the agency’s delinquency index in June 2012 after it defaulted at maturity and was quickly foreclosed upon within two months. The property is reported to be under contract with a closing expected within the next week.
"With rising values and practical bond ownership, special servicers (and) controlling classes for the most part can no longer collect fees while just promising a better day, especially while making advances,” said Shlomo Chopp, managing partner, distressed debt advisory of Case Property Services in Brooklyn, NY. “The numbers just don’t work and there is way too much uncertainty. The inflation in property values, forces the special servicer to recommend a sale.”
Marielle Jan de Beur, managing director and head of structured products research for Wells Fargo Securities, noted this week that while the amount of CMBS-related liquidations and modifications has declined in 2013 compared to 2012, it has still been an active year for loan resolutions as well.
“Special servicers are choosing to take advantage of the favorable market conditions and continue to utilize bulk loan sales,” Jan de Beur said, adding, “While the liquidation-to-modification ratio in 2013 has been lower compared to 2012, we do not expect that to be the long-term trend. With market conditions continuing to improve, we expect liquidation volumes to remain steady and anticipate the continued use of bulk loan sales by the special servicers. On the other hand, we expect modification activity to continue to decline."
KBS REIT III Ditching Debt Investments for Core Properties
KBS Real Estate Investment Trust III notified investors that it is changing its investment strategies this past week and planning to move away from debt and mortgages to buy core office properties.
KBS REIT III, a trust formed in 2010 by KBS Capital Advisors, has raised more than $555 million since its initial offering. As of June 30, 2013, it had acquired 10 office properties encompassing 3.3 million rentable square feet.
Previously, the REIT had expected to invest 20% to 40% of its proceeds from its ongoing public offerings in such investments such as mortgages, mezzanine, bridge and other loans, debt and derivative securities related to real estate assets.
The other 60% to 80% of proceeds were to be invested in core properties.
“However, due to current markets conditions for the types of real estate-related investments that we had intended to target, such as first mortgage loans, and opportunities for investments in core properties, we currently may not make any significant investments in real estate-related investments, and we now expect our primary investment focus to be core properties,” the REIT reported in a filing with the U.S. Securities & Exchange Commission.
However, the REIT did note, “We will not forego a good investment because it does not precisely fit our expected portfolio composition.”
Housing Moves Up with the Stock Market, By a Lot in Some Cases
For every $1 billion increase in stock value of local companies in a given area, the median sale price of nearby homes increases by $4,400, according to an interesting new report from Seattle-based Redfin, a tech-powered residential real estate brokerage firm.
Redfin released a report analyzing the correlation between home prices in a given area, and the stock valuations of publicly traded companies located nearby. The study incorporates home prices and aggregate stock valuations of 824 public companies across 19 metro areas over the last 20 years.
For an area like Silicon Valley, where 45 publicly traded companies are valued at $1.1 trillion, this means that an increase in stock value of just 1% could potentially lead to a rise in median sale price of more than $48,000. The report also found that there is typically a three-month lag time from a change in a region’s aggregate stock valuation and a subsequent corresponding change in local median home prices.
Of the 19 major markets examined in the study, Las Vegas, followed by Silicon Valley and New York, saw the strongest correlation between median home sale price and the stock valuation of local companies.
Zip code 94043 in the heart of Silicon Valley has seen substantial wealth created since Google went public in 2004. The nearly $300 billion Google valuation, among other local Silicon Valley companies, has helped drive home prices in Mountain View from $600,000 in 2009 to more than $1 million in 2013.
“Certainly, we are not suggesting that homebuyers should make decisions about buying or selling based on how they believe nearby companies will perform on Wall Street,” said Tommy Unger, real estate data analyst at Redfin and the report’s author. “Nevertheless, in Las Vegas and Silicon Valley, homeowners live and die by the success or failure of their corporate neighbors.”
“Just imagine if back in 1990, someone guessed that Silicon Valley’s otherwise sleepy Mountain View, the home to computer chip maker Intel, would be a prime location for businesses capitalizing on the crazy new phenomenon called The Internet,” Unger said. “Or, what if Bill Gates had decided to keep Microsoft in Albuquerque, where it was originally founded? Just consider this: Seattle’s median home price is $395,000 today, compared to $212,000 in Albuquerque. A $288 billion dollar company in New Mexico could have drastically changed its home price trajectory.”
Capital Markets Round-Up
completed its first multifamily bulk loan sale. An affiliate of Colony Capital purchased the portfolio of 27 performing mortgage loans with an unpaid principal balance of $195 million, which included multifamily, student housing and assisted-living facilities. Freddie Mac retained Mission Capital Advisors as loan sale advisor.
priced its inaugural credit risk sharing transaction under its Connecticut Avenue Securities (C-deals) series. The Series 2013-C01 $675 million note offering priced is the first in a series of planned offerings aimed to help reduce taxpayer risk and attract private capital to the housing market.
C-deal notes differ from other Fannie Mae securities and debt issuances. When Fannie Mae issues fully guaranteed single-family MBS, it retains all of the credit (mortgage default) risk associated with losses on the underlying mortgage loans. In return, Fannie Mae receives a guaranty fee. When issuing credit risk sharing securities, Fannie Mae transfers some of the retained credit risk to investors in exchange for sharing a portion of the guaranty fee payments.
Investors in C-deals may experience a full or partial loss of their initial principal investment, depending upon the credit performance of the mortgage loans in the related reference pool.
, on behalf of SEBA Professional Services
, is offering a $5 billion portfolio of non-performing residential loans for the U.S. Department of Housing and Urban Development
(HUD). The HUD SFLS 2014-1 loan sale consists of two parts. A national offering of approximately 24,000, single family loans totaling $4 billion in unpaid principal balance (UPB) will bid on Oct. 30 and December 10, 2013. The loans are secured by properties across the United States. A Neighborhood Stabilization Outcomes Pool (NSO) offering of 5,000 loans totaling $1 billion in UPB will bid Dec. 10, 2013. The NSO pools are secured by properties in Atlanta, Baltimore/ DC, California, Indianapolis and Las Vegas.
Keep up weekly on national news, trends and property leads with the Watch List Newsletter,
a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert
. A new issue is published Monday mornings.