Commercial Mortgages Showing Signs of a Brighter Road Ahead
[Update 1: Adds Barcap commentary.] A market bracing for a potential commercial mortgage crisis saw brighter road signs this week of slowing delinquencies, growing loan values and incoming investments despite the risk. Optimism remains tapered, however, as the commercial sector usually lags behind the residential side, which is showing only fragile signs of recovery itself. The blistering climb of commercial real estate delinquency rates, which crossed the 6% threshold in December, started to slow in February, according to the analytics firm Trepp, which monitors collateral performance on related commercial mortgage backed securities (CMBS). The amount of commercial loans at least 30-days delinquent grew 23 basis points (bps) to 6.72% in February, the smallest increase in six months. Commenting on the market, analysts at Barclays Capital note that "the pace of deterioration in CMBS accelerated modestly," in February. "What was particularly troubling [in] this month was the surge in specially serviced current loans. By current balance, more than $3.3bn of current loans transitioned to their respective special servicer this month." Further, the value of commercial real estate loans that collateralize commercial mortgage-backed securities (CMBS) grew to 76.7% of the original loan price through January 2010, up from 75.9% in December, according to DebtX. DebtX priced nearly 60,000 CRE loans with a combined principal balance of $700.2bn. Despite the January gains, loan values remain below their original prices and even below the 81.3% level reported in January 2009. “Loan prices rose in January due primarily to the downward shift of the treasury yield curve and a modest tightening of whole loan spreads,” said DebtX CEO Kingsley Greenland. “These improvements in the capital markets were partially offset by weak commercial real estate fundamentals.” Researchers at Cushman & Wakefield, a commercial real estate (CRE) services provider, anticipate a 30% climb in global CRE investments in 2010. C&W monitors commercial property investment flows in 56 countries. New investments, particularly in the US market, will push CRE investments to $478bn through 2010. The possible growth in 2010 is a turnaround from 2009 when investment volumes dropped 23% to $365bn, the lowest level since 2003. But researchers noted that from the first half of the year to the last half, liquidity lines showed signs of freeing up and investments grew 104%. David Hutchings, head of research EMEA at Cushman & Wakefield said that investors aren’t shying away from the risk, even with capital returns on US commercial real estate falling to a record low in 2009, according to the Investment Property Databank (IPD) US Quarterly Property Indicator. “While challenges clearly remain and a double-dip can not be ruled out, a higher risk appetite among financiers and investors will continue to fire the market,” Hutchings said. Write to Jon Prior.