A Weekly Column of Market Conditions, Company Expansions and Contractions and Real Estate Investment Opportunities
In this week’s issue: matured balloon loans
are driving up delinquencies in CDO and CMBS deals; the MBA reports that apartment loans
are at historical lows; title insurers
go into the red; Citi
is cutting mortgage assets and operations; and a performing loan
on a trophy office asset in Dayton goes up for auction. Plus, we give you the latest notices of facility closures
and mass layoffs and properties on the Watch List
Nonpaying Matured Loans Boosts CDO Delinquencies
An increase in performing and non-performing matured balloon loans drove the U.S. commercial real estate loan (CREL) CDO delinquency rate for February 2008 to 0.93%, up again from last month's rate of 0.70%, according to the latest CREL CDO Loan Delinquency Index (LDI) from Fitch Ratings.
In addition to the matured loans mentioned, the LDI includes loans that are 60 days or greater delinquent and repurchased loans.
Further, Fitch noted 47 reported loan extensions in February 2008 of which 20% of these extensions were modifications from the original loan documents. The increase in loan extensions together with the higher number of matured balloon loans reflects the lower available liquidity in the commercial real estate market.
Although the overall delinquency rate for CREL CDOs remains low, it is more than three times the U.S. CMBS loan delinquency rate of 0.27% for January 2008, which was a historical low.
February 2008 is the third consecutive month in which the index has increased. The CREL CDO delinquency index is anticipated to be more volatile than the CMBS delinquency index given the smaller universe of loans and the more transitional nature of the collateral
The Fitch 2008 loan delinquency index encompasses 14 loans, which include five loans that are 60 days or more delinquent, seven matured balloons, and two repurchased loans.
There are six new matured balloons, including three loans secured by interests in the same collateral, the EOP Macklowe portfolio. The loans, which are secured by interests in four high quality office buildings in Midtown Manhattan, matured on Feb. 9, 2008. The borrower has reportedly been served with a notice of default by at least one of its lenders.
Although not included in the loan delinquency index, 11 loans, representing 0.52% of the CREL CDO collateral were delinquent 30 days or less in February 2008. This statistic is up significantly from last month's total of 0.15%. While five of these loans were brought current after the cutoff date for this report, the other loans suggest cause for concern for higher overall delinquencies next month.
Apartment Delinquencies at Historically Low Levels
The Mortgage Bankers Association (MBA) released its inaugural analysis of Commercial/Multifamily Mortgage Delinquency Rates for Major Investor Groups that shows delinquency rates ended 2007 at or near record lows for most major investor groups.
Fourth quarter delinquency rates for four of the five largest investor groups - commercial mortgage backed securities (CMBS), life companies, Fannie Mae and Freddie Mac - remained at or near historically low levels.
For the fifth group, FDIC-insured commercial banks and thrifts, delinquency rates were lower at 2007's year-end than during five of the previous 11 years and 10 of the previous 16 years.
"This is an important new analysis that helps cut through much of the recent 'noise' on commercial real estate finance," said Steve Graves, managing director & chief operating officer of Principal Real Estate Investors and chair of the Mortgage Bankers Association's Commercial Board of Governors. "Despite a great deal of attention being paid to economic uncertainty, it is reassuring to know that the performance of commercial and multifamily mortgage loans and bonds has remained so fundamentally sound."
The new MBA analysis looks at commercial/multifamily delinquency rates since 1996 and compares year-end rates for the five largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae and Freddie Mac. Together these groups hold more than 80% of commercial/multifamily mortgage debt outstanding.
Delinquency rates for each group at the end of the fourth quarter were as follows.
-- CMBS: 0.40% (30+ days delinquent or in REO);
-- Life company portfolios: 0.01% (60+days delinquent);
-- Fannie Mae: 0.08% (60 or more days delinquent) -- Freddie Mac: 0.02% (60 or more days delinquent);
-- Banks and thrifts: 0.80% (90 or more days delinquent or in non-accrual).
Title Insurers Go into the Red
Historically, it is rare for U.S. title insurers to produce net losses. However, four out of five publicly traded, national title underwriters in Fitch's rating universe reported losses in 2007 due to declining revenues and unexpected growth in incurred claims losses.
"As title insurance is a cyclical business, ratings are assigned at a level that can withstand a normal industry cycle," said Doug Pawlowski, sector head for title insurance ratings at Fitch. "However, the current downtrend may be unusually severe and longer in duration than past cycles, and create significant pressure on some company ratings."
Leading indicators of future title insurance revenues, including mortgage origination and title insurance order flow, reveal that further challenges lie ahead. Reducing expenses remains the key element to profitability in a down market and title insurers with a greater proportion of fixed costs will be at a disadvantage and will require significant expense restructuring to restore profitability.
The poor results in 2007 are also attributable to unfavorable loss reserve development from the policy years in the previous cyclical earnings peak years of 2003-2006. Higher than anticipated loss ratios in these periods indicate that underwriting quality diminished greatly when industry participants were operating at full capacity.
"There is some concern that these reserve deficiencies coupled with operating losses will affect capital adequacy within the title industry," added Gerald Glombicki, director in Fitch's Insurance Rating Group.
The fourth quarter deterioration in title insurers performances came unexpectedly. In late November, Fitch had reported that expense initiatives that title underwriters had undertaken last year were expected to gain traction during 2008, resulting in a slight improvement in operating margins.
Fitch reported then that mortgage originations had fallen by 15% in 2007 with both purchases and refinancings declining roughly in proportion.
Fitch reported in November that it does not expect prospects for the title insurance industry to show significant improvement until 2009 at the earliest.
In its latest report, Fitch said the outlook now is for further deterioration in 2008 and 2009.
Citi To Unload Loans, Cut Operations
Citi plans to reduce residential mortgage assets in its U.S. mortgage business by approximately $45 billion over the next 12 months, a 20% decrease from December 2007 levels, and will cut the amount of new loans to be held in portfolio by more than 50% in the next year.
In addition, the company will integrate middle office and support areas to serve both first and second mortgage operations, organize sales channels around customer segments, and strengthen ties with Citi Markets & Banking, which will be the primary provider of capital markets services to its U.S. mortgage business going forward.
Citi expects these changes to reduce expenses by approximately $200 million on a run rate basis within 12 months.
In January, Citi announced the creation of an end-to-end U.S. residential mortgage business that includes origination, servicing and capital markets securitization execution headed by Bill Beckmann.
As part of that change, Citi will consolidate operations, policies and procedures in its U.S. mortgage business. In addition, it will integrate all residential mortgage operations under the CitiMortgage name, including CitiMortgage, Citi Home Equity and Citi Residential Lending.
CitiMortgage intends to increase the level of loans sold to agencies such as Fannie Mae and Freddie Mac or securitized to approximately 90% of production by the third quarter, up from 65% in 2007.
Loan on Dayton Highrise Goes Up for Bid
In current market conditions, notes coming to market are more inclined to be nonperforming, but that is not the case with Mission Capital Advisors latest note auction.
Mission Capital is soliciting bids on behalf of an unidentified seller for a performing loan on a trophy office asset in Dayton, OH.
The loan of $21.5 million on a Class A, multi-tenanted, 341,657-square-foot office property. The loan was issued in April 2007 with a 5.71% current interest rate. Built in 1989, the current occupancy of the property is 90% and is reporting a debt service coverage of 1.95 times. The loan is current, performing and has never been delinquent.
Mission Capital did not and would not identify the building by address or seller by name. But according to records with the Montgomery County (Ohio) Recorder of Deeds, Ducru Spe LLC, took out a $21.5 million loan with Eurohypo AG New York on April 9, 2007, on One Dayton Centre at 1 S. Main St. in Dayton.
Indicative bids are due March 26, 2008, with final bids dues April 15, and a closing scheduled for April 22.
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Facility Closures and Permanent Mass Layoffs
Ziff Davis Media Inc. filed a voluntary petition for Chapter 11 bankruptcy reorganization in the Southern District of New York, listing assets of more than $100 million and liabilities of more than $500 million. As part of its bankruptcy filing, Ziff Davis is looking to cancel its 19,469-square-foot lease for office space at 800 Jorie Blvd. in Oak Brook, IL
. Ziff Davis has not occupied the space since 2002. The lease was to expire at the end of this year.
Merrill Lynch is discontinuing mortgage origination at its First Franklin subsidiary in the United States and will explore the sale of Home Loan Services, a mortgage loan servicing unit for First Franklin. Since July, Merrill Lynch has reduced staffing at First Franklin by nearly 70%. About 650 people will be affected by the discontinuation of mortgage origination at First Franklin and First Franklin’s NationPoint division. Home Loan Services is a profitable, mortgage servicer located in Pittsburgh, PA
, servicing First Franklin originated mortgage loans. Merrill Lynch will solicit bids for Home Loan Services in the coming weeks.
The following future closings and permanent mass layoffs were reported in California
-- Ametek HCC is laying off 24 employees on April 18 at 4501 Arden Dr. in El Monte and another 52 employees on April 25 at 4232 Temple City Blvd. in Rosemead.
-- BP Products North America Inc. is laying off 117 employees on April 2 at 4 Certerpointe Dr. in La Palma.
-- Community and Mission Hospital is closing its pediatric and obstetrical departments at its Huntington Park campus at 3111 E. Florence Ave.; about 100 workers will be transferred or terminated. Mission shut down its urgent care operations last year.
-- GE Hitachi Nuclear Energy is laying off 167 employees by the end of the year at 1989 Little Orchard St. in San Jose.
-- General Electric Global Research is closing down and laying off 37 employees on May 7 at 19310 Pacific Gateway Dr. in Torrance.
-- Harman Becker Automotive Systems Inc. is closing down and laying off 325 employees on April 22 at 8500 Balboa Blvd. in Northridge.
-- Luxfer Inc. is closing down and laying off 140 employees on April 28 at 1995 Third St. in Riverside.
-- Micronas USA Inc. is closing down and laying off 93 employees on April 30 at 2805 Mission College Blvd. in Santa Clara.
-- Optical Communication Products Inc. is closing down and laying off 129 employees by May 26 at 6101 Variel Ave. in Woodland Hills.
-- Pacific Gas And Electric Company is laying off 97 employees on April 14 at 77 Beale St. in San Francisco.
-- Pacific Sunwear Of California Inc. is closing down and laying off 158 employees on April 18 at 3450 East Miraloma Ave. in Anaheim.
-- Siemens Medical Solutions is laying off 43 employees on July 2 at 1230 Shorebird Way in Mountain View.
-- The Boeing Company is laying off 126 employees on April 3 at 2401 E. Wardlow Road in Long Beach.
-- Translite Sonoma is closing down and laying off 32 employees on April 4 at 22678 Broadway, Suite #1, in Sonoma.
-- World Minerals Inc. is laying off 131 employees on May 31 at 2500 Miguelito Road in Lompoc.
The following future closings and permanent mass layoffs were reported in Illinois
-- Aargus Security Systems is closing down and laying off 398 employees at 4047 W. 40th St. in Chicago starting this week.
-- Due to a relocation, Bodine Electric is closing down and laying off 120 employees at 2500 W. Bradley Place in Chicago on May 9.
-- FastTrak Application Development is closing down and laying off 115 employees at 330 Fairbank St. in Addison on April 18.
-- Due to a company-wide reorganization, Kaplan Financial is laying off 150 employees at 30 South Wacker Drive, Suite 2500, in Chicago on April 2.
-- Laser Tek Industries Inc. is closing down and laying off 100 employees at 4909 U.S. Highway 12 in Richmond on April 18.
-- Littelfuse Inc. is laying off 188 employees at 800 E. Northwest Highway in Des Plaines and is closing down and laying off 51 employees at 2781 Katherine Way in Elk Grove Village.
-- Morgan Stanley Credit Corp. is laying off 70 employees at 75 North Fairway Drive in Vernon Hills.
-- Due to financial/ economic conditions Wickes Furniture is closing down and has started laying off 134 employees at 250 S. Gary Ave. in Carol Stream and is closing down and has started laying off 110 employees at 351 W. Dundee Road in Wheeling.
Dov Pharmaceutical Inc. has amended its 133,686-square-foot headquarters lease at 150 Pierce St. in Somerset, NJ
, so that it has reduced the remaining term from eight years to one year and reduced its rent from $240,000 a month to $100,000 a month. In doing so, it has forfeited a $4.2 million security deposit.
The following future closings and permanent mass layoffs were reported in New York
; layoff dates were not specified.
-- Boscov's is closing its department store at 75 West Route 59 in Nanuet and laying off 122 employees.
-- CBS Studios Inc. - The Montel Williams Show at 433 W. 53rd St. in New York City is closing down and laying off 74 employees.
-- PELCO is laying off 80 workers at 10 Corporate Drive in Orangeburg.
-- Robeco Investment Management Inc. is laying off 150 employees in New York; Robeco has operations at 909 3rd Ave. and 1 New York Plaza.
-- Tech Valley Printing is closing down and laying off 50 workers at 2550 9th Ave. in Watervliet.
-- TeleTech Niagara Falls is laying off 340 employees at 333 Rainbow Blvd. in Niagra Falls.
-- Transervice Logistics Inc. (Motormen Haulage Division) is closing down and laying off 110 employees at its plant at 360 S. Van Brunt St. in Central Islip.
-- Vanity Fair Brands with several locations in New York City is laying off 62 employees.
-- Wachovia Corp. is laying off 55 employees in New York, where it operates at several addresses.
The following future closings and permanent mass layoffs were reported in Pennsylvania
-- Erie Plastics is laying off 189 employees at 844 Route 6 in Corry; layoffs have already begun.
-- Extendicare Health Facilities Inc. is closing its Glenshire Woods Personal Care Facility 1 in McKeesport and laying off 58 April 30.
-- GMAC Financial Services is closing down and laying off 60 employees at 555 Business Center Drive in Horsham on May 1.
The following future closings and permanent mass layoffs were reported in Texas
-- Brazos Higher Education Service Corp. is closing its facility at 300 E. Highland Mall Blvd. in Austin. The first round of lay-offs started Feb. 27 with the last to occur Oct. 31, when the plant will close.
-- GMAC Financial Services is closing down and laying off 58 employees at 11757 Katy Freeway in Houston, with the first layoff to occur May 1 and the last to occur before year-end.
For news of retail store closings, see CoStar's Retail News Roundup
, a weekly report on retail expansion plans, acquisitions/mergers/sales, closings, bankruptcies and more written by Sasha M. Pardy, senior news editor.
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Property Watch List
| Property || Property Type || CMBS || Special Servicer || Notes |
| Secure Self Storage/Livonia, 12851 Inkster Road, Livonia, MI || Self storage, 666 units || Deutsche Mortgage 1998-C1 || LNR Partners || The borrower was unable to payoff the loan at maturity (Nov. 1). |
| Secure Self Storage/Waterford, 4303 Highland Road, Waterford, MI || Self Storage, 666 units || Deutsche Mortgage 1998-C1 || LNR Partners || The borrower was unable to payoff the loan at maturity (Nov. 1). |
| A Storage Inn #3, 14500 Chef Menteur Highway, New Orleans, LA || Self Storage, 561 || Deutsche Mortgage 1998-C1 || LNR Partners || The loan was transferred to special servicing after the borrower's representative requested debt relief because some of the properties were having cash flow problems due to structural damage from Hurricane Katrina. The lender is pursuing the foreclosure. The borrower's principals are in the process of working on a settlement proposal. |
| A Storage Inn #1, 1709 Gause Blvd. West, 2355 E. Gause Blvd., Slidell, LA || Self Storage, 1,165 units || Deutsche Mortgage 1998-C1 || LNR Partners || The loan transferred to special servicing for monitoring after the borrower's representative requested debt relief due to structural damage from Hurricane Katrina. |
| Fay's Midtown, 14-16 Cayuga St., Oswego, NY || Retail, 68,274 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan passed its anticipated repayment date (Oct. 1, 2007) without paying off. The borrower has asked for a two-year extension. |
| Grandma's Truckstop, 9378 West State Road 114, Rensselaer, IN || Retail, 6,298 square feet || GMAC 1997-C1 || Capmark Finance || The loan was transferred to special servicing in May 2005 due to payment default. The special servicer is pursuing foreclosure. |
| Jubilee Supermarket, 45-47 Ellicott Street, Batavia, NY || Retail, 49,112 || Prudential 1999-NRF1 || KeyBank Real Estate Capital || A single tenant vacated the property in 2007 and stopped making rental payments. The borrower has offered a deed-in-lieu of foreclosure. The third-party reports have been received and the servicer is evaluating the proposal. |
| 732-736 Vestal Parkway East, Vestal, NY || Retail, 46,850 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan transferred to special servicing following a November 2007 maturity default. The borrower is trying to refinance. |
| Southlake Retail Center, 1311 Mount Zion Road, Morrow, GA || Retail, 22,520 square feet || GMAC 2001-C2 || Capmark Finance || The specially serviced asset is real estate owned and was transferred to special servicing after the largest tenant, Hi-Fi Buys, representing 67% of the space, went dark in 2005 and defaulted on its lease in May 2007. The lease was guaranteed by Tweeter, which filed for Chapter 11 bankruptcy protection in June 2007. The property currently is 16% occupied. |
| Shaw's CarpetSmart, 100 Jay Scutti Blvd., Henrietta, NY || Retail, 21,938 square feet || GMAC 1997-C1 || Capmark Finance || The property has been real estate owned since August 2007. The property is currently 100% vacant and the special servicer is marketing the property for sale. The property is listed with CB Richard Ellis/Rochester at $2.2 million. |
| Jefferson Smurfit Bldg., 401 Alton St., Alton, IL || Office, 55,000 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan transferred to special servicing due to the single tenant vacating the property prior to the expiration of its lease at the end of 2007. The property remains 100% vacant. Deed in lieu of foreclosure has been finalized and recorded and the property will become real estate owned. |
| Southern Company Center, 270 Peachtree Street, Atlanta, GA || Office, 335,923 square feet || LB-UBS 2000-C3 || LNR Partners || The borrower is performing on a forbearance agreement, which expires May 1. |
| Westfield Apartments, 14405 Rio Bonito, Houston, TX || Multifamily, 424 units || Wachovia 2006-C26 || CWCapital Asset Management || Bids on the loan have been received, awaiting closing. |
| Pines Point Apartments, 3102 Oradell Lane, Dallas, TX || Multifamily, 318 units || Wachovia 2006-C26 || CWCapital Asset Management || Bids on the loan have been received, awaiting closing. |
| SteepleCrest Apartments, 11220 West Road, Houston, TX || Multifamily, 260 || Wachovia 2002-C2 || Capmark Finance || The loan was transferred to special servicing in October 2007 for monetary default. A receiver was appointed, and the target foreclosure date was set for February 2008. The most recent reported occupancy was 75%. |
| Stonehedge Apartments, 5301 Stonehedge Drive, Evansville, IN || Multifamily, 251 units || LB-UBS 2003-C3 || Capmark Finance || This loan was transferred to special servicing in June 2006 due to monetary default. Judicial foreclosure is in process and McKinley Inc. is in place as receiver. A short sale offer for the property at a reduced price of $5.2 million fell through in December. The property was 70% occupied as of year-end. A foreclosure sale was scheduled for Feb. 28. |
| Casa Palm Apartments, 700-712 N. Las Vegas Blvd., Las Vegas, NV || Multifamily, 200 || CSFB 2000-C1 || Capmark Finance || The loan was transferred to special servicing in July 2004 due to litigation between the borrower and a perspective buyer over the transfer of the property. The special server is waiting for final judgment. The loan remains current. The borrower has indicated a desire to pay off the loan or defease. |
| Spanish Trace, 1919-1939 East Grauwyler Road, Irving, TX || Multifamily, 136 units || Wachovia 2006-C26 || CWCapital Asset Management || The borrower has paid the note interest payment through January and has proposed a forbearance agreement, which includes a discounted payoff amount. |
| Vallejo Village Shopping, 1601 Marine World Parkway, Vallejo, CA || Mixed Use, 40,940 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The borrower was unable to payoff the loan at maturity (Feb. 1) and is requesting an extension. |
| The Crossing at Indian Trail, 2040 Beaver Ruin Road, Norcross, GA || Mixed Use, 22,500 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan passed its anticipated repayment date (Oct. 1, 2007) without paying off. |
| Franklin Station, 1166 Franklin Road, Marietta, GA || Mixed Use, 20,581 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan passed its anticipated repayment date (Oct. 1, 2007) without paying off. |
| Aquarium Village/aka Newport B, 2925 S.S. Ferry Slip Road, Newport, OR || Industrial, 88,072 square feet || Deutsche Mortgage 1998-C1 || LNR Partners || The loan transferred to special servicing in February after the borrower tore down one of the buildings on the property without obtaining lender approval. |
| Howard Johnson (formerly Holiday Inn), 2705 East Houston Hwy, Victoria, TX || Hotel, 226 rooms || CSFB 2000-C1 || Capmark Finance || The franchise agreement was terminated and the borrower is in litigation with the franchise company. Intercontinental Hotels Group terminated the Holiday Inn franchise at the end of the 2006 due to low customer satisfaction scores. The property has been converted to a Howard Johnson. Debt service for the loan remains current. |
| Branson Towers Hotel, 236 Shepherd of The Hills Expressway, Branson, MO || Hotel, 210 rooms || Deutsche Mortgage 1998-C1 || LNR Partners || The loan transferred to special servicing in October due to maturity default. The borrower is currently working to refinance the loan. |
| Best Western Executive Inn, 27441 Helen Drive, Perrysburg, OH || Hotel, 102 rooms || Prudential 1999-NRF1 || KeyBank Real Estate Capital || This loan was transferred to special servicing in December 2007 as a result of a franchise membership being cancelled. |
| Sonoma Acres Convalescent Hospital, 765 Donald Street, Sonoma, CA || Health Care, 32 units || Mortgage Capital Funding 1998-MC2 || KeyBank Real Estate Capital || The loan has been chronically delinquent in the past. The borrower has been working to refinance the loan. The borrower and trust are negotiating terms on a forbearance agreement on a balloon payment. |
| Avon Portfolio, 2003 Bennett Ave, 2001 Fitzhugh Ave. and 5027 Live Oak St., Dallas, TX || Multifamily, 151 || Wachovia 2002-C2 || Capmark Finance || The loan transferred to special servicing in September 2007 due to imminent default. The loan has matured and the borrower is seeking a one-year extension. The borrower has stated that the collateral properties are not generating sufficient NOI to meet the debt service requirements due to low occupancy and the borrower is subsidizing the monthly payments. The borrower has made the monthly payments through January. |