Net operating income (NOI) for 2006-2007 vintage CMBS loans are on the rise, according to Fitch Ratings, though the bond rating firm said many NOIs remain below banker underwritten levels at issuance, perhaps not too surprising since many of those loans were underwritten during an especially 'frothy' period that contributed to a bubble in property valuations.
On average, servicers reported NOI for the 2006 and 2007 vintages has increased 1.2% from year-end 2010, led by hotels and multifamily performance.
Despite these gains in performance, Fitch Ratings maintains a stable to negative outlook for asset performance given that 20% of the loans' NOIs (by number) remain significantly (25% or more) lower than bankers' underwritten levels at issuance. Many loans from the 2006 and particularly the 2007 vintage were underwritten to expected NOI levels or pro forma income.
Office NOIs showed an average decrease in year-end 2011 NOI of 2.3% from year-end 2010. Approximately 21% (by number) of office loans' NOIs remain significantly below banker underwritten levels at issuance.
While some U.S. markets remain strong (e.g. New York, Boston and San Francisco) Fitch Ratings said it remains cautious of loans with upcoming lease rollovers in markets with tepid employment growth and/or those with market rents significantly below levels seen at issuance.
In stark contrast, hotel property loans continue to show dramatic recovery in NOI. On average the year-end 2011 NOI for hotel loans has increased 9.8%, a healthy gain for the property type.
Several large loans had outsized gains in NOI reflecting the sector's path to recovery from severely distressed levels. Notably, about 40% of the hotel loans' NOIs remain significantly below the banker's issuance levels, given the aggressively underwritten loans in the peak of the market. Fitch Ratings is continuing to monitor hotel performance for a new peak.
As could be expected, multifamily also made dramatic improvements in NOI for year-end 2011: an increase of 5.2% over year-end 2010. About 16% of all multifamily loans' NOIs remain significantly below banker underwritten NOI at issuance.
Despite lower than issuance NOI levels many of these loans may be refinanced out of the pools due to the robust financing market provided by government sponsored enterprises, Fitch analyst noted.
Retail property loans have made slight gains in NOI. Year-end 2011 is up 0.6% over year-end 2010. Fitch Ratings remains cautious of retail loans with upcoming property lease expirations. About 17% of all retail loans' NOIs remain significantly below issuance levels.
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