12/04/2009

Rate of Loans in Special Servicing Nears 9%

The percentage of commercial MBS loans in special servicing climbed sharply to almost 9% last month, fueled largely by the transfer of the $3 billion loan on the Stuyvesant Town apartment complex in Manhattan.

There were $65.2 billion of loans in special servicing at the end of November, a net increase of $8.2 billion, or 14%, from October, according to Trepp.

Three giant mortgages accounted for more than half of the increase: the Stuyvesant Town loan, a $967.2 million mortgage on a hotel portfolio controlled by CNL Hotels & Resorts and a $344.6 million loan on a hotel portfolio owned by investor Ty Warner. But eight other loans of more than $100 million were also transferred.

The $8.2 billion monthly increase was the second largest ever, after a $12.4 billion spike in May following the bankruptcy filing by General Growth Properties. The latest transfers drove up the special-servicing rate to 8.95%, from 7.91% at the end of October. The net number of loans in special servicing climbed by 8%, or 266, to 3,585.

The special-servicing rate has now climbed for 19 months in a row and stands 22 times higher than the record low of 0.40% in August 2007. The bulk of the increase has come this year. Loans in special servicing have climbed by a net $52.7 billion, or 423%, from $12.5 billion at the end of last year. The number of loans in the hands of special servicers has almost tripled, from 1,275 at the end of 2008.

The recent revival of securitization activity could tamp down future loan transfers by providing some borrowers with a way to refinance maturing loans, said Manus Clancy, a Trepp managing director. "Six months ago, there was no escape hatch for the billions of dollars of loans coming due - now there is a small one," he said. "That may take some pressure off the surging special-servicing numbers."

But, Clancy added, the market still faces stiff headwinds. Real estate fundamentals don't appear to be improving. Rulings in the General Growth bankruptcy case could encourage other borrowers to play hardball with servicers on loan modifications, which could push additional loans into special servicing. And a court ruling that rent increases in Stuyvesant Town were illegal could put other large New York apartment properties at risk of default. "So the outlook is a mixed bag," Clancy said.

The transfer of the Stuyvesant, CNL and Warner loans drove up the shares of multi-family and hotel loans in special servicing. Some 13% of multi-family CMBS loans are now in special servicing, by balance, up from 10.1% at the end of October. On the hotel side, 17.3% of the total are in special servicing, up from 14.7% at the end of October.

Retail mortgages continue to account for the largest percentage of loans in special servicing - 31.8%, or $20.8 billion. Multi-family mortgages come next, at 22%, or $14.4 billion, followed by hotel loans, at 19.2%, or $12.5 billion.

Hotel loans' share of the special-servicing universe is significantly higher than that property type's 9.9% share of overall CMBS collateral. By contrast, office loans account for only 10.7% of mortgages in special servicing, versus a 30.2% share of outstanding collateral. The difference partly reflects the fact that hotels are susceptible to economic downturns more quickly than office buildings, which tend to have long-term leases. But the rate of office loans being transferred to special servicing has picked up in recent months.

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