Tuesday, May 01, 2007

A Warning on Risk in Commercial Mortgages / NYT

not a pretty picture....especially when the economy is slowing down and is close to a recession

kein schöner anblick...besonders wenn man bedenkt das die wirtschaft gearde in die rezession rutsch.

Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate.

Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these bonds on behalf of bond dealers have issued warnings in the past, but last month they sounded a new note of urgency, saying for the first time that they would adjust their ratings to reflect their concerns.

“Underwriting has gotten so frothy that we have to take a stand,” said Jim Duca, a group managing director at Moody’s Investors Service. “The industry was heading to Niagara Falls.”

The readjustment is occurring just as signs are emerging that the office market is slowing down nationwide. Though rents continued to rise in the first quarter of this year, the average vacancy rate for 58 metropolitan markets across the country rose to 12.6 percent from 12.5 percent, the first increase for any quarter since 2004....

Cautioning that “a few months don’t represent a trend,” Mr. Steir said real estate was a cyclical business. “The key to success so far has been to be the high bidder on everything available,” he said. “At some point, that strategy stops working.”....

Standard & Poor’s said that in the first quarter of this year, the delinquency rate for such bonds fell to its lowest level since its delinquency index was created in 1999.

But many of the loans issued recently could result in problems down the road, the bond analysts said. As was the case in the overheated residential mortgage market, many loans for commercial transactions are interest-only for the first 10 years, with huge balloon payments at the end of the term. The agencies say lenders are not requiring landlords to set aside adequate reserves to cover taxes, insurance and other costs if things go wrong and are accepting projections for rent growth that may be too optimistic.

Fitch predicted a 15 percent increase in defaults of loans that are being written now.

Space in Manhattan that was leased a while back for an annual rent of $40 a square foot may reasonably be said to be worth $70 a square foot in today’s market, said Mr. Duca at Moody’s Investors Service. But he said some lenders were now claiming that space that was recently leased for $70 a square foot was actually worth $90 a square foot. “That’s how aggressive it is now,” he said. “We’re saying the lending environment doesn’t make any sense.”

In one spectacular example of a hastily concluded deal, Macklowe Properties, a Manhattan company, took only 10 business days to complete its $7.25 billion purchase of eight Midtown office buildings that had belonged to Equity Office Properties before Equity was sold to the Blackstone Group in what was then the largest leveraged buyout ever. The average annual rent for the buildings is $55 to $59 a square foot, but the deal was underwritten with projections of future rents of $100 a square foot or more.

>here are is one more detail of the deal!
>hier noch etwas um die zahl oben besser einzuordnen
Last year, 41 tenants in Manhattan agreed to pay that much or more, .(41 tenants in entire manhattan?! what a conservative concept......./ 41 mieter in gesamt manhattan..... klingt nach einem soliden concept)


While the agencies are just beginning to carry out their new credit-tightening standards, their warnings are already having repercussions in the bond market. Investors are demanding higher rates of return, making the bonds costlier for the dealers, said Rob Brennan, the global head of real estate financing for Credit Suisse. “The fact is that the marketplace forces the change immediately,” he said.

Last week, a new $4.2 billion commercial-mortgage-backed security offered by GE Capital had to be restructured after investors complained that the originators of several of the loans had relied too heavily on projected income increases from the buildings, according to Commercial Mortgage Alert, a weekly trade newsletter. Five loans totaling $226.7 million were removed from the offering, and the investment-grade portion of another loan was further trimmed by $50 million, the newsletter reported. Mr. Brennan said the proceeds from the bond could be reduced by as much as $8 million because the bonds with high yields sell for much less than the top-rated bonds.

Most of the loans removed from the offering were originated by Deutsche Bank, which also provided $6 billion in debt financing for the purchase by Macklowe Properties of nearly all the Manhattan portfolio of Equity Office Properties. .....

disclosure: short reit index

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