Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor September 2017

Fixed Income Commentary

The legacy CMBS delinquency rate and special servicing rate ended September at 43.5% and 51.6%, respectively, driven largely by payoffs and liquidations factoring down the outstanding balance of legacy loans (denominator effect).

One of the largest legacy liquidations in September was $77MM City View Center (20.1% MSC 2007-IQ14), secured by a 506,141 square foot (SF) grocery-anchored shopping center built upon a former-landfill in the Cleveland suburb of Garfield Heights, OH. The loan transferred to special servicing in November 2008 when a property expansion exposed concerning levels of methane gas leaking into tenant-occupied spaces. The largest tenant at the property, occupying 146,781 SF, closed its store due to safety concerns – which triggered a number of cotenancy provisions that resulted in rent reductions and additional store closures. The property value, which stood at $103.4MM at origination in 2007, was down to $200,000 as of May 2016. The defaulted loan was resolved through a sale that closed in September at a 100% loss severity to the trust.

In CMBS 2.0, the delinquency rate rose 10 bps to 0.39% and the special servicing rate rose 8 bps to 0.63%. Three of the largest loans to transfer to special servicing during the month were secured by malls, two of which carried five-year terms and have upcoming maturities in November 2017: $67MM Fashion Outlets of Las Vegas (6.7% COMM 2012-CR4) and $31MM Salem Center (3.5% JPMCC 2012-LC9). The updated valuations of these properties (which should be ordered by the special servicer) as well as modifications and/or resolutions of the loans may offer insight into the outcome for many of the weaker malls securitized in CMBS with predominantly 10yr-terms.

The Fashion Outlets of Las Vegas loan is secured by a leasehold interest in a 375,722 square foot (SF) single-story outlet shopping center in Primm, NV (40 miles outside Las Vegas). At the time of the 2012 refinance, the property reported in-line tenant sales productivity of $399 (PSF) and an occupancy rate of 94%. As of the first quarter of 2017, occupancy stood at 69%, and the most net operating income (NOI) at the property (2016) was 24% lower than underwriting. Per the servicer commentary, the loan was transferred to special due to imminent maturity default. The retail property is currently owned by the original mezzanine lender, who foreclosed on their pledged equity interests in the borrower when the mezzanine loan defaulted in 2016.

The Salem Center loan is secured by fee and leasehold interests in 211,851 SF of a 649,624 SF regional mall located in downtown Salem, OR. There are no financials reported for 2017 but the property’s 2016 NOI was 16% lower than underwriting and occupancy stood at 80% as of year-end. The loan transferred to special servicing with two months remaining until final maturity. The borrower’s ability to refinance may be compromised by heavy competition in the smaller Salem market. Indeed, the subject’s primary competitor, located three miles away, is currently undergoing a $30MM redevelopment into a lifestyle center (scheduled completion Spring 2018).

In new issue, five conduits totaling $4.9BN priced during the month. The conduits featured a mix of risk retention solutions – including three vertical, one horizontal, and one L-shaped – and execution on the benchmark LCF AAA class varied between swaps +89-96bps. Including September’s issuance, year-to-date conduit volume stands at $33.7BN – modestly ahead of 2016’s $30.2BN.

In single asset single borrower (SASB), five deals totaling $3.5BN, priced. Risk retention solutions varied between vertical (three transactions) and horizontal (two transactions). Only one of the SASB deals was fixed rate, carrying a 10-year term and secured by a NYC office tower; the AAA’s priced at swaps + 99bps. The floating-rate AAA’s on the remaining SASB deals saw execution between L+85bps – L+88bps. Year-to-date SASB issuance volume totals $24.6BN– over twice 2016’s $12.0BN volume.


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