Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor June 2017

Fixed Income Commentary

The legacy CMBS delinquency rate and special servicing rate ended June at 35.5% and 43.2%, respectively, as pay downs and liquidations reduced the outstanding universe of legacy loans to $57.8BN (denominator effect) and a larger proportion of 2006-2007 loans outstanding are secured by underperforming and/or overleveraged properties (adverse selection).

One of the largest loans to enter special servicing was $265MM 400 Atlantic Street (24.8% GSMS 2007-GG10), secured by a 527,424 squarefoot Class A office building in Stamford, CT. The property featured a highly concentrated tenant mix at issuance, with the top three tenants representing 83% of the building’s occupancy. The loan first moved to special servicing in 2014 when all three tenants gave notice that they would not renew upon their respective lease expirations. The third-largest tenant (7% occupancy) vacated in September 2014, the secondlargest tenant (25% occupancy) vacated in December 2015, and the third-largest tenant (51% occupancy) focused on subleasing space until September 2018 maturity. The Borrower’s attempts to find new tenants faltered amidst broader weakness in the Stamford office market (30% vacancy), with significant free rent periods and tenant-improvements required to maintain occupancy at the property. As of year-end 2016, the office building was 99% leased while the loan carried a 0.86x debt service coverage ratio. The most recent valuation (2015) implied a 60% valuation write-down since issuance, resulting in a 198% mark-to-market loan-to-value (LTV) ratio on the interest only debt. The loan entered special servicing due to imminent monetary default (June 2017 maturity).

Reviewing the refinance success rate for loans scheduled to mature in 2017, the first half of the year ended with a 64% success rate, down from 72% in 2016 and 79% in 2015, but at the high-end of Street projections (55-65%). During the month, liquidation volumes totaled $1.5BN across 57 loans, with nearly 70% of the liquidation activity within the 2006-2007 vintages. The average loss severity excluding nonmaterial losses (defined as less than 2.0% loss) was 49%, down from 58% in May.

In CMBS 2.0, the delinquency rate and special servicing rate remained modest at 0.25% and 0.53%, respectively. Reviewing payoffs, a total of $743MM (27 loans) paid in full during the month, bringing the 2.0 retired balance to $14.2BN (647 loans). Additionally, $180MM (29 loans) were defeased, bringing the 2.0 defeased balance to $9.4BN (549 loans), of which $5.6BN (421 loans) remain outstanding.

June was a busy month in new issue, with $9.6BN private-label pricing across 14 deals, resulting in year-to-date issuance of $32.9BN, a 30% increase from the first half of 2016. Five conduits ($5.0BN) priced, with execution on the LCF AAA’s ranging from swaps + 91-110bps and execution on the BBB-‘s ranging from swaps +365-450bps. Risk retention varied between L-shaped and vertical solutions.

In Single Asset Single Borrower (SASB), nine deals ($4.6BN) priced, consisting of three fixed-rate and six floating-rate transactions. Only two deals carried a 10-year term, one backed by a super-regional mall in Los Angeles (AAA’s priced at swaps + 120bps) and one backed by a NYC CBD office (AAA’s priced at swaps + 92bps). Risk retention varied between horizontal and vertical solutions.

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