11.10.17: Trepp: CMBS Delinquency Rate Drops Sharply in October

The Trepp CMBS delinquency rate dropped sharply in October, marking the fourth straight monthly decline. The delinquency rate for U.S. commercial real estate loans in CMBS is now 5.21%, down 19 basis points from the September level. That is the second-largest rate drop measured in the last 19 months. One year ago, the overall 30-day delinquency rate was 4.98%. The delinquency rate had been climbing consistently for more than a year as loans issued in 2006 and 2007 reached their maturity dates and were not paid off via refinancing. In the 16 months between March 2016 and June 2017, the delinquency rate moved up 13 times. However, now that the dreaded “wave of maturities” has passed, delinquency levels have receded as well.

Trepp notes that further declines in the overall reading are possible in the coming months as fewer 2006 and 2007 loan reach their maturity dates and more distressed loans are resolved.

Vacancy by Property Type – October 2017



  2017 2016 BP Change
Industrial 6.24% 6.55% -31
Lodging 3.42% 3.84% -42
Multifamily 2.98% 2.00% -2
Office 6.92% 7.10% -18
Retail 6.47% 6.56% -8

Source: Trepp

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11.5.17: Sears and Kmart: More Stores to Close

Sears Holdings Co. announced that it will close another 18 Sears stores and 45 Kmart locations in late January 2018. This round of closures brings the total number of Sears and Kmart stores shutting down this year to 243. After the locations shutter, about 680 Sears stores will remain operating in the United States, down from 3,500 locations in 2010. Currently, 610 Kmart locations are operating in the United States.

Market professionals believe the company is likely to file for bankruptcy after the Christmas 2017 selling season. The iconic store chain, whose goods once filled U.S. households from the garage to the living room, has struggled to remain relevant as shoppers increasingly bypass it to head to big box giants like Walmart or specialty retailers like Best Buy and Home Depot.

There are continuing signs that Sears is no longer the dominant player it once was. Last month, Sears announced that for the first time in more than 100 years, it would no longer sell Whirlpool appliances because the two companies could not reach an agreement on price.

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11.1.17: Multifamily Trends – Vacancies Rise as Supply Exceeds Demand

Property managers are offering larger and larger concessions to try to attract tenants to their apartment communities, but the vacancy rates are inching higher anyway.

The percentage of vacant apartments in Manhattan in October rose to 2.47%, up from 2.39% the year before. At the same time, property managers offered potential renters months of free rent, equal to 28% of a year’s lease in October, on average, up more than four percentage points from a year ago.

Marcus and Millichap notes in a recent report that apartment absorption has begun to fall short of the wave of new unit deliveries in numerous markets, modestly softening Class A fundamentals. Class B and C apartments remain near record occupancy levels, but some renters from these properties are being enticed into higher-tier apartments by a range of incentives. Looking forward, positive employment trends and a thinning development pipeline offer the potential for performance reinvigoration.

For additional details, see the complete report at http://www.marcusmillichap.com/research/researchreports.

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ValueXpress Obtains $15-Million CMBS Conduit Loan for the Refinance of the Ambridge Regional Distribution and Manufacturing Center in Ambridge (Pittsburgh), PA

ValueXpress has arranged a $15-million CMBS conduit loan for the refinance of a 1-million-square-foot warehouse and light manufacturing industrial park located in Ambridge, Pennsylvania, 15 miles north of Pittsburgh. The property features 22 buildings that were constructed in stages between 1920 and 1968. In 1991, two new buildings of 20,000 square feet and 11,000 square feet, respectively, were built.

Ambridge Regional CenterAmbridge Regional Center, Ambridge (Pittsburgh), PA

The property was acquired by the owner in June 1988 with the objective of undertaking a major physical renovation and conversion to a multiple-tenant warehouse and industrial park. The property was significantly underperforming at acquisition with occupancy of 32%. The sponsor has invested over $11 million in the project to bring occupancy close to 80% and increase revenue from $1 million annually to over $4 million. In recent years, the economic benefit from natural gas fracking has created increased activity in the Pittsburgh market and for the subject property. For example, Shell purchased a site within 10 miles of the Ambridge Regional Center as the company evaluates constructing a multi-billion-dollar ethylene cracker at the site.

The transaction was structured with a 10-year term and a 20-year amortization schedule. The loan proceeds provided a substantial return of equity to the sponsor, reflecting the substantial value that has been created in the project. In addition, the loan features a very attractive interest rate in the mid-4% area.

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10.27.17: Great Rates for Borrowers as CMBS Spreads Approach Post-Crash Low

A current rally has pushed the long-term super-senior AAA-rated CMBS bonds near the lowest levels that prevailed before the financial crisis in 2008-2009. On Friday, Morgan Stanley, Bank of America and Wells Fargo priced the super-senior CMBS from a $944-million offering at 76 basis points (bp) over swaps, down from 83 bp on the prior deal that priced a week earlier. The post-crisis low of 71 bp that was recorded in August 2014 now appears to be within reach.

CMBS traders and investors attributed the strong demand partly to the possibility that supply will dwindle as the year comes to an end. Also, concern exists that CMBS loan originators will have fewer lending opportunities in 2018 because of a decrease in maturing mortgages and increased competition from agency and portfolio lenders for loans.

“With these CMBS deals establishing new pricing levels, borrower loan spreads have fallen roughly 10-15 bp as declines in CMBS spreads directly correlate to borrower loan spreads,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “As a result, we are seeing interest rates in the 4.25-4.50% for low-leverage transactions and 4.50-4.75% for full-leverage transactions.”

Now may be a good time to secure a fixed-rate CMBS conduit loan as rates may rise in 2018 if the Federal Reserve continues to increase rates in 2018.

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10.24.17: ValueXpress Helps Clients with CMBS Insurance Claims

The destructive natural disasters, including hurricanes, wildfires and tornados, that have occurred this year are resulting in a spike in insurance claims for CMBS borrowers. Many of our clients are reaching out to ValueXpress for assistance with coordinating approvals of insurance claims on their properties with insurance adjusters and CMBS servicers. We provide this service at no charge to our clients. Many of our clients are unaware the servicer needs to be notified in the case of a loss, depending on the amount of the claim.

The first step to determine the level of servicer involvement is to calculate what is known as the restoration threshold. In the CMBS Loan Agreement, the restoration threshold will be defined as a percentage of the loan amount, often 3%. So on a $5-million loan, with a 3% hurdle, the restoration threshold is $150,000. This means that the borrower may negotiate an insurance settlement without servicer involvement at or below that dollar amount, and although the settlement check will be payable to both the borrower and the servicer, the servicer will promptly sign over the proceeds to the borrower and the borrower will be obligated to complete the restoration.

For damage above the restoration threshold dollar amount, the process is more involved. The borrower may settle and adjust such a claim only with the prior written consent of the servicer, and if the borrower fails to settle and adjust such a claim within sixty (60) days after the casualty, the lender has the right to settle and adjust the claim at the borrower’s cost and without the borrower’s consent.

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10.20.17: Office Trends — Flexibility and Work/Life Balance

In order to attract and retain talented workers, corporate property managers need to accommodate “flexible working,” according to Regus, a leading provider of small office workspaces with 3,000 locations in 120 countries. More than 50% of workers now work outside the main office two to three days per week or more, according to the Regus Workplace Revolution report.

Compared with previous years, Regus notes that more consultants and freelance workers, as well as older employees working beyond pensionable age, want greater freedom to work flexibly. These workers can be highly skilled and talented, but they require flexibility in terms of work environment, such as accommodating an unwillingness to commute an hour or more to a suburban office location when the work can be completed in a local office environment.

Giving staff the ability to work in flexible or activity-based workspaces, even if it’s just for part of the week, attracts talent and it can save corporations a lot of money in desk space. Although leases have become shorter and more flexible in most cities over the past 30 years, living and working costs are high in the major cities. Annual costs in London are $88,800 per employee, according to the Savills Live/Work index, and $111,900 in New York City.

Yolande Barnes, Savills World Research Director, suggests that property managers need to look at other workspaces too, including shared spaces or studios that are laid out in a way that encourages co-working or co-creation. Such spaces are better suited to new flexible work styles, fit employee lifestyle choices and meet the needs of different generations. They offer places to meet interesting groups and to collaborate more easily.


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