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Increasing REO Sales Driving CMBS Delinquency Rates Lower

More Large REO Sales on the Way
July 15, 2013
As special servicers continued to ramp up sales of their real estate owned (REO) properties, U.S. CMBS delinquencies fell to their lowest level in more than three years, according to the latest index results from Fitch Ratings.

CMBS late-pays declined 19 basis points (bps) in June to 7.18% from 7.37% a month earlier, the lowest level since March 2010. Fitch said the decline was largely fueled by the sale of $622 million (in stated loan balance) of REO assets across 34 Fitch-rated transactions (mostly from 2005-2007 vintages). This compares with just $262 million in May.

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In June, CMBS special servicers resolved $1.2 billion in delinquent loans, more than offsetting newly delinquent loans of $709 million for the month. Additionally, Fitch-rated new issuance volume of $5 billion kept ahead of $2.1 billion in portfolio runoff, causing an increase in the index denominator.

One loan accounted for more than a quarter of the newly delinquent loan volume. The $186.5 million loan for the Park Hyatt (formerly the Four Seasons) Aviara Resort (WBCMT 2007-C30), backed by a 329-room luxury resort hotel in Carlsbad, CA. The loan was modified back in February 2011 but returned to special servicing in April for imminent default. In June, the loan fell more than 60-days behind in payments for a second time. The Park Hyatt Aviara loan sent the hotel late-pay rate up 65 bps month-over-month.

Meanwhile, rates for the other major property types all posted declines. Most notably, the industrial rate fell by over one percentage point thanks to two large dispositions: the $78 million Hughes Airport Center Portfolio (GSMS 2006-GG6) and the $48 million Cold Storage Industrial (LB-UBS 2007-C1).

The multifamily rate pushed 32 bps lower, helped by a roughly $3 billion net increase in its denominator from new Freddie Mac issuance.

In addition, office and retail saw their late-pay rates fall-each by close to 20 bps-as resolutions outpaced new additions by more than two-to-one.

The June balance sheet clean-up included the sale of two REO loans: the Silver City Galleria (JPMCC 2005-LDP4) and Continental Towers (COBALT 2006-C1). Both assets were sold at significant losses.

The Silver City Galleria mall, a 714,898-square-foot regional mall in Taunton, MA, sold last week for $22.1 million, representing a loss of approximately 91%. At issuance in 2005, the property was appraised at $200 million and was encumbered by a $138 million dollar first mortgage. Anchor tenants include JC Penney, Dicks Sporting Goods and Best Buy; non-collateral anchor tenants include Sears and Macy’s.

The mall's original borrowers, a partnership between General Growth Properties and the Teachers Retirements System of the State of IL, turned over the keys to the lender in December 2011.

Another notable REO sale involved a loan for Continental Towers in suburban Chicago, which was sold at the end of May 2013 for a reported 78% loss. The original $115 million loan was backed by three 12-story office buildings totaling 900,000 square feet in Rolling Meadows, IL.

In addition, several other large REO assets are poised to be sold in the coming months, which is expected to drive the CMBS delinquency rate even lower, including a portfolio of REO assets that ORIX Capital Markets, as special servicer, has placed for sale. Other expected upcoming sales include the $124 million The Shops at Dos Lagos (JPMCC 2008-C2) and the $115 million Gwinnett Place (MLMT 2007-C1).

In addition, a disposition of the $133 million Duke Cleveland East Suburban Portfolio (LB-UBS 2007-C2) is also expected to be reported within the next month. Based on their stated loan balances, the sale of those four assets would lower the delinquency rate another 17 bps to almost 7%.

Other Large CMBS-Related REO Sales from Q2

(Source: CoStar COMPs)

3500 Lenox Road NE - One Alliance Center
Atlanta, GA
553,017 SF Class A Office Building; Built in 2001
Buyer: Highwoods Properties
Seller: ORIX Capital Markets
Sale Price: $140,100,000

10777 Westheimer Road - One Westchase Center
Houston, TX
466,137 SF Class A Office Building; Renovated in 2004, Built in 1982
Buyer: Investcorp International Inc.
Seller: LNR Property Corp.
Sale Price: $83,600,000

2001 York Road - 2001 York Center Oak Brook
Oak Brook, IL
184,017 SF Class A Office Building; Built in 1999
Buyer: Pembroke Hobson LLC
Seller: CWCapital Asset Management
Sale Price: $34,000,000

55 Park Place NE
Atlanta, GA
557,629 SF Class A Office Building; Built in 1983
Buyer: Georgia State University Foundation Inc.
Seller: C-III Asset Management
Sale Price: $33,500,000

9550 Ash St. - Villa Medici Apartments and Townhomes
Overland Park, KS
166 Unit, 148,100 SF
Buyer: Cocke Finkelstein Inc.
Seller: US Bank NA Series 2006-C23
Sale Price: $19,000,000

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