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CRE Loan Distress Levels Escalating Rapidly

Volume of Delinquent/Defaulted CMBS Loans Could Triple in 2009
January 14, 2009
The distressed loan situation in commercial real estate is taking a striking turn for the worse, according to a CoStar Group analysis of December loan information on more than 83,000 loans in commercial mortgage backed securities.

The level of distressed loans in the CMBS universe was at historically low, and unsustainable levels, in 2008 - less than 1% of outstanding loans. That compares favorably to the level of commercial real estate distress in bank and thrifts where distressed properties made up about 2.32% of their nonresidential portfolios as of Sept. 30.

However, that level of safety in the CMBS universe looks like it could be eroding rapidly.

The amount of loans placed in special servicing - generally an indication of a delinquency or failure to pay off a mature loan - rose dramatically in the fourth quarter - from about $400 million per month in September to more than $1.6 billion in November.

And that trend is likely to continue in the near term as the number of loans identified by CMBS servicers as having potential credit issues more than doubled from about $3.5 billion per month to about $7.5 billion in November.

In preparation for its first market outlook presented last week, CoStar also undertook its first-ever analysis of delinquent and distressed properties in the CMBS market, examining loans with a total value of more than $700 billion.

CoStar identified nearly 1,200 commercial real estate loans that were either delinquent in loan repayments or had reached maturity without pay off of the loan. The principal and interest outstanding on those loans as of mid December totaled nearly $8.2 billion. (Editor’s Note: We identify and detail, the 10 largest of those delinquent/specially serviced loans at the end of this story.)

CoStar also compiled a list of nearly 6,100 additional loans that servicers for those securities have flagged as having potential credit concerns. The current scheduled ending balance of those loans totaled $57.8 billion.

In addition, CoStar identified more than 160 properties that had been repossessed by various CMBS trusts. The properties had a loan value at the time they were taken over of more than $1 billion. Based on the properties most recent valuations, the bondholders were likely to take a loss of more than $300 million. (Editor’s Note: We will identify and detail, the 20 largest of those REO loans in next week’s Watch List column.)

Where CoStar was expecting the number of currently delinquent loans to be in the states with the most commercial real estate, e.g. New York, California, Illinois, Texas, New Jersey, that turned out not necessarily to be the case. The number of delinquent commercial real estate loans appears to closely parallel areas of the country that have suffered most from the crisis in the housing market. In addition, the number of delinquent commercial real estate loans was also high in the industrialized Midwest states:

State, No. of Delinquent CMBS Loans
Texas, 171
Florida, 126
Michigan, 83
California, 81
Georgia, 71
Ohio, 71
New York, 70
Nevada, 42
Arizona, 39
Illinois, 34

Moving forward, however, it appears likely that the number of delinquent loans could start to increase in the population centers. The number of loans that CMBS servicers have placed on their watch lists as having potential credit issues is highest in the following states:

State, Number of Potential Problem Loans
Texas, 890
California, 741
New York, 445
Florida, 432
Ohio, 269
Michigan, 247
Georgia, 219
Arizona, 212
Illinois, 180
Pennsylvania, 180

Looking at delinquencies by property type, it is also apparent that this is a housing-led recession. Most commercial real estate delinquencies are showing up first in multifamily loans and then loans on retail properties as falling housing values have cut into consumer spending.

Going forward, retail properties continue to show potential credit concern but trouble also appears to be brewing in the office sector as well.

CoStar Group’s analysis is in line with Wall Street’s outlook for growth in CMBS delinquencies, which is for a nearly 300% increase in the number of commercial real estate loans that will become delinquent in 2009.

Fitch Ratings' CMBS loan delinquency index rose to 0.64% in November 2008. It projects that delinquencies will continue to rise, reaching approximately 2% by year-end 2009.

Moody's Investors Service's CMBS loan delinquency index rose to 0.75% in November 2008. It projects that delinquencies will continue to rise, reaching its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level as the market begins to form a bottom in 2010 and 2011.

Top 10 Largest Specially Serviced or Delinquent Loans

Riverton Apartments, New York, NY
Multifamily, 1,947 units
Owner, Manager or Sponsor: Rockpoint Group LLC and Stellar Management
Current Thru: 10/1/2008
Current Ending Balance: $225 million
Servicer Comment: The loan transferred to special servicing for imminent default. The borrower has been unable to convert stabilized units into deregulated units as quickly as expected and has converted only 10% of the units (128 units) to fair market rents as of July 2008. Default letters were sent to the borrower and its mezzanine lender and negotiations are ongoing.

Resorts AC- Hotel & Casino, Atlantic City, NJ
Hotel, 879 rooms
Owner, Manager or Sponsor: Colony Capital LLC
Current Thru: 10/9/2008
Current Ending Balance: $175 million
Servicer Comment: The loan was transferred to special servicing in December November 2008 payment being delinquent.

Biscayne Landing, North Miami, FL
Land, 188 acres
Owner, Manager or Sponsor: Boca Developers
Current Thru: 12/9/2008
Current Ending Balance: $110 million
Servicer Comment: An updated appraisal commissioned for the project was completed by Joseph Blakes Associates. A second notice concerning no further forbearance agreement was issued but alternate resolution strategies under evaluation.

Meyberry House, New York, NY
Multifamily, 179 units
Owner, Manager or Sponsor: R. A. Cohen & Associates Inc.
Current Thru: 11/11/2008
Current Ending Balance: $90 million
Servicer Comment: The special servicer (ING Clarion) offered its conditional approval to the borrower's request for consent to a modification of its mezzanine loan. The modification will allow the borrower to defer one-half of its mezzanine loan payments for a period of approximately four years. After the modification is documented, the loan will be removed from special servicing.

Wyvernwood Garden Apartments, Los Angeles, CA
Multifamily, 1,187 units
Owner, Manager or Sponsor: Thurman Interim California LLC
Current Thru: 12/8/2008
Current Ending Balance: $86 million
Servicer Comment: The loan was transferred to the special servicing in October due to correspondence from the borrower indicating an imminent default. The borrower also has requested a modification and/or forbearance period under the loan. Discussions are ongoing.

City View Center, Garfield Heights, OH
Retail, 506,141 square feet
Owner, Manager or Sponsor: City View Center, LLC (Thomas Klein)
Current Thru: 10/8/2008
Current Ending Balance: $81 million
Servicer Comment: Recent correspondence from WalMart indicates that the retailer is not planning to re-occupy its premises. It cites numerous defaults by the borrower, including deferred maintenance. WalMart has not paid rent or other charges since September. According to the management company, the amount owed is in excess of $400,000. Recent correspondence from the borrower's legal counsel state that the borrower is prepared to assist the lender to preserve the value of the property; however, it is likely the borrower will decide to close the center since revenues will not cover expenses. Legal counsel has been engaged.

Springhurst Towne Center, Louisville, KY
Retail, 1,287,594 square feet
Owner, Manager or Sponsor: Centro Properties Group
Current Thru: 12/1/2008
Current Ending Balance: $77 million
Servicer Comment: The special servicer (ING Clarion) approved one-year loan extension to 11/1/2009 with an increase in the interest rate to 9.33%. This extension also allows partial pay downs of the loan as other properties in Centro’s Galileo portfolio are sold.

Montgomeryville Residence Inn, North Wales, PA
Hotel, 821 rooms
Owner, Manager or Sponsor: Tharaldson Property Management Inc.
Current Thru: 11/9/2008
Current Ending Balance: $71 million
Servicer Comment: The mezzanine lender on the property does not plan to extend its loan, which was a condition for extending the primary loan, which matured in October 2008.

Gateway Shopping Center, West Bloomfield, MI
Retail, 257,844 square feet
Owner, Manager or Sponsor: Gateway Center LLC (Markus Ernst, Jeffrey Surnow, Allan Adelson and Peter Karmanos)
Current Thru: 10/3/2008
Current Ending Balance: $60 million
Servicer Comment: Linens N Things (a 37,000-square-foot tenant) vacated the center. The borrower remitting net cash flow and is trying to negotiate pay / accrue modification.

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