Commercial Mortgage Market Monitor June 2016

Fixed Income Commentary

The legacy 30+ delinquency rate increased 0.47% in June to 11.40%, with the majority of new delinquencies coming from the 2006 cohort (as loans reach maturity), up 2.67% to 16.58%. The special servicing rate increased 0.77% to 14.37%. One of the largest loans to enter special servicing was $155MM Portals I (23.29% GCCFC 2006-GG7), secured by a 476K SF Class A office property in Washington, DC. As of year-end 2015, the loan had a 0.79x debt service coverage ratio and the property was 81.0% occupied; the reason for transfer was imminent maturity default (July 6th maturity).

The payoff success rate for legacy loans scheduled to mature in 2016 declined 1.0% to 81.0%. One of the largest loans to mature without payoff was $87.25MM Mesa Mall (16.78% BACM 2006-4), secured by 560K SF of anchored retail in Grand Junction, CO. As of year-end 2015, the loan carried a 1.69x debt service coverage ratio and was 96% occupied. The loan was transferred to special servicing in May 2016 due to imminent maturity default and missed the June 1st maturity; however, management notes they have multiple offers from lenders to refinance the loan.

$158MM legacy loans prepaid with penalties during the month, representing an 11.0% decline from May and a 47.9% decline from the 2015 average of $303MM. The percentage of legacy defeased loans increased marginally, by 0.25%, to 12.90%. One of the largest newly defeased loans was One Seaport Plaza (14.93% MSC 2007-HQ11), secured by a 1MM SF Class A office property in lower Manhattan along the East River. As of the first quarter of 2016, the loan carried a 2.08x debt service coverage ratio and the property was 83% occupied.

June legacy liquidation activity totaled $913MM, representing a $52MM decline from May and the fifth consecutive month lower than $1BN. The average loss severity for legacy is 47.4%; eliminating loans with less than 2.0% losses, the average is 56.7%. One of the highest trust severity rates was 126% on the Holiday Inn – Warren, PA (0.30% MSC 2007-HQ11), as the hotel property was liquidated after being in Real Estate Owned (REO) status since April 2014.

In CMBS 2.0, 15 loans totaling $221MM became newly delinquent, bringing the total balance of 30+ delinquency to $760.6MM across 71 loans for a rate of 0.32%. The largest loan to become newly delinquent was $132.3MM Times Square Hotel Portfolio (15.70% DBUBS 2011- LC3A), secured by two hotels (488 rooms) in Manhattan’s Times Square. The loan became non-performing matured after failing to refinance by the June 6th maturity date, despite the sub-servicer reporting that the loan would pay off at maturity. As of the first quarter of 2016, the loan carried a 1.55x debt service coverage ratio and the properties were 96% occupied. Four loans totaling $43.3MM were newly transferred to special servicing, though the special servicing rate declined 0.03% month-over-month to 0.42%, totaling $1.0BN across 85 loans.

21 CMBS 2.0 loans, totaling $161MM, realized Appraisal Reduction Amounts (ARA’s) during the month. Ten of the loans, totaling $62.1MM, represent first-time appraisal reductions while 11 loans, totaling $93.3MM, were updated appraisals. Seven of the ten new ARA’s were located in oil-sensitive regions. The largest loan impacted was $11.5MM Custer Crossing (1.16% COMM 2014-CR15), secured by a multifamily property in Dickinson, ND. The appraisal was reduced 62.4% from $17.84MM to $6.70MM in April, and the current ARA amount is $6.06MM.

As of April 2016, the loan had a 0.05x debt service coverage ratio and the property was 34% occupied. The loan transferred to special in February 2016 and is now four months delinquent.

Payoff activity during the month totaled $456MM across 29 loans, bringing the total CMBS 2.0 paid-off balance to $9.2BN across 424 loans. The largest loan to pay off at maturity was $85MM Keystone Marquee Office Portfolio (4.2% DBUBS 2011-LC2A), secured by a three-building suburban office complex totaling 257K SF in Wayne, PA. As of the first quarter of 2016, the loan had a debt service coverage ratio of 1.74x and the property was 87% occupied. Additionally, 22 loans, totaling $345.5MM, were defeased, bringing the total 2.0 defeased balance to $5.8BN, of which $3.4BN (across 213 loans) remain outstanding. The largest loan to defease was $165.5MM One South Wacker Drive (5.01% WFRBS 2013-C11 and 8.11% WFRBS 2013-C12), secured by a 1.2MM SF Class B+ office building in Chicago’s central business district (January 1st, 2018 maturity).

June was a quiet month for private label new issue with no conduit deals, only two Single Asset Single Borrower (SASB) deals totaling $462MM (both ten-year fixed-rate retail with AAA’s sw+135-140bps and BBB-‘s sw+325-335bps), and one $380MM single-sponsor fixed-rate deal (LCF AAA’s sw+140bps and BBB-‘s retained by the sponsor). Reviewing the first half of 2016, private label issuance is down 47% yearover- year (at $26.6BN), with conduit down 36% (at $18.5BN) and SASB down 64% (at $7.0BN). Given the limited new issue supply, private label CMBS net issuance could reach -$85BN this year. On a positive note, most 2016 conduit underwriting metrics show an improvement from 2015, with lower LTV’s at 62.3% (64.8% 2015) and higher debt yields at 10.2% (9.8% 2015), reflecting the more conservative origination environment.

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