Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor August 2017

Fixed Income Commentary

The legacy CMBS delinquency rate and special servicing rate increased again in August, ending the month at 41.1% and 48.9%, respectively, as pay downs and liquidations continue factoring down the outstanding balance of legacy loans (denominator effect). Adjusting for $4.2BN of August pay downs, the legacy balance outstanding totals $45BN, around 14% of the aggregate 1.0/2.0 conduit universe.

One of the largest legacy payoffs during the month was $95MM Lakeside Mall (61% BACM 2007-4), secured by a 1,182,521 square foot super regional mall in a suburb of New Orleans, LA. The interest-only loan was sized to a more conservative 32% loan-to-value (LTV) ratio and reported a healthy debt service coverage ratio (DSCR) of 2.97x before paying in full. At origination, the retail center reported in-line sales productivity of $746 per square foot (PSF) and the latest reported occupancy at the property was 97% (as of March 2017). Performance improved during the loan term, with net operating income (NOI) increasing over +43% between 2007-2016 (granted the growth was largely baked into underwriting assumptions, with the 2016 NOI peak only +6.5% higher than the 2007 underwriting).

In CMBS 2.0, the delinquency rate and special servicing rate increased modestly, to 0.42% and 0.73%, respectively. One of the largest loans to become newly delinquent was $17.7MM World Houston Plaza (1.5% COMM 2014-LC17), secured by a 216,889 square-foot Class A suburban office building in Houston, Texas. The partial interest-only loan was originated at a 67% LTV and reported a 2.06x DSCR as of March 2017, along with a property occupancy rate of 90%. The property’s largest tenant, totaling over 50% of the leased space, was an oilfield service company that vacated their space in May (at lease maturity) as part of a broader corporate consolidation effort. The borrower subsequently stopped making loan payments in May.

Reviewing new issue activity, three conduit deals totaling $2.7BN priced during the month. Execution on benchmark LCF AAA’s ranged between swaps +90-95bps, while execution on BBB-‘s ranged between swaps + 325-360bps. Comparing average year-to-date 2017 conduit new issue pricing to full-year 2016 averages, 2017 LCF AAA’s are 30bps tighter, at swaps + 93bps, than the 2016 average of swaps + 124bps.

Seven single asset single borrower (SASB) deals priced, totaling $3.6BN, including two fixed-rate and five floating-rate deals. The two fixedrate deals were both carried 10-year terms and were secured by office properties, one in NYC (53% LTV) and one Santa Monica, CA (45% LTV). The NYC office AAA’s priced at swaps + 91bps while the Santa Monica office AAA’s priced at swaps +90bps.

Including the $6.3BN that priced in August, year-to-date private-label issuance totals $48.4BN, an increase of +38% year-over-year. Annualizing the pace estimates $73BN of volume for 2017, above the 2016 total of $66BN, but still short of the $92.5BN total in 2015.

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