28:1 = substantial write downs for CMBS
28 to 1 is the ratio of downgrades to upgrades last week in the CMBS market, a staggering number by any measure. 5 tranches within 1 CMBS deal was upgraded, while 28 deals comprised of 139 tranches were downgraded by credit rating agencies. The saying location, location, location has less relevance today than it had in the past as financial conditions for real estate has been squeezed given higher cap rates and lower prices.
500 5th Avenue, a 727K sq. ft. Manhattan office building is >80% occupancy rate, strong tenant roster, robust debt coverage of 2.86x DSCR, according to Trepp. The $200M loan backing this building has just been assigned to special servicer; the owner recently decided not to make its interest payment despite having the ability as the sponsor is a foreign owner that decided their unable to roll the loan that is held in a CMBS deal, according to a recent report.
SASB deals (single asset-single borrower) in/near default represent 8.7% of the market, a 3x increase since the Fed began raising rates. According to a bank broker-dealer there are 10 SASB AAA bonds that may take a principal loss. Banks hold the largest percentage of CRE loans – over 50% and regulators are concerned, who are now pushing banks to lend more conservatively in the future, which is causing a credit crunch. Maturing loans will often require the owner to write an equity check that reflects the lower property value and the simple fact that the bank lender will want to lend at a more conservative LTV. Private capital will help fill this valuation/LTV gap and that is a healthy development for property owners.
Marathon Asset Management is “open for business.” While I believe valuations have bottomed for the overall marketplace, each asset is unique with its own characteristics, and despite the valuation lows having been established, there remains a mind-blowing number of properties that will require amendments, extensions, workout, and new money solutions in the coming years. Marathon is actively lending to strong sponsors on attractive assets.
There is value in the CMBS market, but one should be vigilant given uncertainty and sheer number of loans that will move to special servicer as the year progresses impairing value for CMBS investors.
CrediQ analysis of properties considered stressed/distressed that were re-appraised in 2023 is shown below in this bar chart. This bar chart captures loans defined as delinquent/with special servicer and shows that the average property in this cohort declined in value by -43%. Rates were artificially low = CRE valuations were artificially high = borrowers took on too much debt. Lending standards have been re-set, so this is a healthy correction, representing a great time to be a lender, earning an attractive risk-adjusted return; despite the pain many CRE owner-operators are experiencing. It was too easy for CRE owners during ZIRP, that was the unfortunate trap.
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