Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor December 2017

Fixed Income Commentary

In December, the legacy CMBS delinquency rate increased by 60 bps to 47.6% and the special servicing rate increased by 40 bps to 54.6%, driven largely by payoffs and liquidations factoring down the outstanding balance of legacy loans (denominator effect).

In CMBS 2.0, the delinquency rate declined by 8 bps to 0.32% and the special servicing rate increased by 2 bps to 0.84% during the month. One of the largest loans to enter special servicing was $38.1MM Northpointe Apartments (3.74% COMM 2013-LC13), a ten-year partial interest-only loan representing acquisition financing for a 951-unit garden multifamily property in Euclid, OH. As of year-end 2016, net operating income (NOI) at the property was 32% lower than underwriting, and as of September 2017, property occupancy was down to 69% (underwritten at 87%) and the debt service coverage ratio (DSCR) on the loan was 0.84x (underwritten at 1.71x). As a result of the performance degradation at the property and the negative carry of the secured debt, the borrower requested that the loan be transferred to special servicing for imminent default.

One of the largest defaulted 2.0 loans to move to foreclosure during the month was $66.7MM Fashion Outlets of Las Vegas (6.9% COMM 2012-CR4; CMBX.6), a five-year loan secured by a leasehold interest in a 375,722 square foot (SF) enclosed regional mall in Primm, NV (40- miles outside of Las Vegas) that reported in-line sales productivity of $399 per square foot (PSF) at issuance. As of year-end 2016, property NOI was 24% lower than underwriting with occupancy at 73%, down from 95% at issuance. The loan entered special servicing for imminent default in August when the borrower communicated that the debt would not be refinanced at maturity. Upon rejection of a modification request in December, the borrower agreed to cooperate with a transfer of the asset. An updated appraisal is expected in early 2018 – offering price discovery for the challenged mall.

Another loan backed by a weaker regional mall, $26.3MM Holiday Village Mall (2.7% COMM 2012-CR5; CMBX.6), paid in full during the month. The retired CMBS debt was secured by fee interest in 489,256 square-feet of a 576,897 square-foot mall in Great Falls, MT, which reported in-line sales productivity of $312 PSF at issuance. Although year-end 2016 NOI was 12% lower than underwriting, the retail center benefits from its status as the only enclosed regional mall within an 86-mile radius. The property’s most recent occupancy was 88% – up from 75% as of year-end 2016 – due to the landlord’s successful re-tenanting of a dark Sears box (vacated December 2014) with two national tenants (in occupancy as of June 2017).

In private-label new issue, a total of $48.5BN conduit deals and $37.8BN single asset single borrower (SASB) deals priced in 2017. Including $1.8BN of multi-borrower floaters, aggregate private label issuance volume totaled over $88BN for 2017, an increase of +26% year-over-year, largely due to an outsized pick-up in SASB volume (+88% year-over-year). Despite the increase in gross issuance, net issuance ended the year at negative $40BN, reducing the outstanding balance of private-label CMBS to roughly $450BN. Of note, the negative $40BN net issuance in 2017 represents a slowdown from the negative $67BN net issuance experienced in 2016. Furthermore, the limited CMBS maturity schedule for 2018 supports projections for positive net issuance in the coming year, with Street expectations of $60-70+BN gross and positive $30- $35BN net issuance for private-label CMBS, suggesting the outstanding balance of private label CMBS could increase to $480-485BN by yearend 2018.

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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW