02/05/2010

10% of CMBS Loans Now in Special Servicing

The percentage of CMBS loans in special servicing has reached double digits.

At the end of last month, a record 10% of securitized commercial mortgages, by balance, were in the hands of special servicers, up from 9.43% on Dec. 31, according to Trepp (see tables on Pages 8 and 9).

Given the way that the special-servicing rate has skyrocketed over the past year, it's no surprise that the gauge reached 10%. But the level is a noteworthy threshold for an industry battered by loan woes.

Meanwhile, the 60-day delinquency rate soared to 6%, from 4.71% a month earlier, Fitch said (see article on Page 10).

At the end of December, $72.3 billion of the $723 billion of outstanding CMBS loans in the U.S. were in special servicing. The special-servicing rate is now six times higher than the yearend 2008 level of 1.62%.

The net amount of loans in special servicing climbed by 5.7%, or $3.9 billion, last month. There was a net increase of 213 loans, bringing the total to 3,991.

Among the large loans added in the past month were three backed by malls: a $550 million mortgage to Pyramid Cos. on Palisades Center in West Nyack, N.Y.; a $190 million senior portion of a $265 million loan to General Growth Properties on Montclair Plaza in Montclair, Calif.; and a $140 million loan to Pyramid on Galleria at Crystal Run in Middletown, N.Y. Special servicers also were handed a $140 million mortgage on the Hyatt Regency in Bethesda, Md., and a $116.8 million loan to New Dawn Cos. on four Tennessee apartment properties.

Hotel loans continue to be the worst performers. The percentage of hotel loans in special servicing, by balance, climbed to 19% last month, from 18.2% on Dec. 31. Multi-family loans were also well above the 10% overall average rate, at 13.8%, up from 13.4%. At the other end of the scale, office mortgages have a below-average 5.9% rate. That reflects the fact that office buildings tend to have long-term leases, which have insulated them from the immediate effects of the recession. However, the office-loan rate has been ticking up in recent months, rising 2.4 percentage points since August.

The special-servicing rate may not stay in double digits for long. That's because $9.9 billion of loans that were transferred to special servicing because of General Growth's bankruptcy filing are likely to be returned to normal status in coming months, following a settlement between the REIT and the special servicers of the loans. Had all of those loans been returned last month, the special-servicing rate would have been 8.6%.

Nevertheless, more loans are certain to be added over time as overleveraged borrowers are unable to refinance at maturity. The pace of maturing CMBS loans will accelerate over the next few years.

Close to half of the loans in special servicing, by principal balance, are actually current on their payments, but are showing some signs of strain - such as the borrower's inability to fully refinance a maturing loan because of the drop in property value. A recent example is the Palisades Center loan, which is scheduled to mature next Tuesday, after exhausting its extension options.

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