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Capital Markets Roundup: Should We Be Concerned About the Fate of CMBS Loans?


Moody’s Investors Service is a little concerned about the fate of multifamily CMBS loans. With such high property values, CMBS loans look modest by comparison, but if property values start to fall, it could spell trouble. For instance, the average CMBS loan in Q2 was 117.8%, which is high compared to historic property values. In fact, it’s disconcertingly higher than the pre-crisis peak of 117.5% in Q3 of 2007, National Real Estate Investor reports. For this reason, Moody’s anticipates some future losses, and it’s getting tougher on its ratings. However, some analysts point out that tighter underwriting standards are preventing a repeat of the mistakes made during the real estate boom, when lending was based on future projections seen with rose-colored sunglasses. Lenders still require a 12-month history of expenses and buyers typically can’t forecast rents to justify a larger loan, even if the property’s history can back it up. It may be an entirely different story outside of the multifamily market.

The lightning-speed default of a loan in Ohio has some analysts wondering if this is a sign of things to come. Strathmore Development Co received $25M from UBS Group AG, along with five dozen other loans to develop a mixed-use district of shops, restaurants and luxury condos called Creekside. Strathmore bundled all the loans together and sold it off as bonds, some with AAA ratings. The loan defaulted within six months and is due to be auctioned off on Wednesday, a fate that would make it one of the top 10 fastest loan liquidations in the history of CMBS—and that includes liquidations during the financial crisis, Bloomberg Business reports. Analysts like Morgan Stanley’s Richard Hill believe Wall Street is loosening standards and backing riskier deals, resulting in faster defaults than before the financial crisis. They point out that appealing near-zero rates have investors requesting the higher-yield CMBS in droves, and banks are selling them at the fastest rate since 2008. Nomura analysts have also identified a number of pro forma loans, an underwriting method defined by Moody’s as being based on “unproven, optimistic” future projections.

And there’s more bad news for the Midwest and the Southeast where $156B of CMBS loans are expected to mature in the next two years. Property values aren't growing as quickly in those areas compared to the Northeast and Mid-Atlantic regions. Retail is expected to take the biggest hit as more than half of its $50B loans will likely need more capital. But this doesn’t mean complete doom and gloom for these areas, Jim Costello of Real Capital Analystics tells Yahoo Finance. Investors can opt for mezzanine financing, or walk away entirely to salvage whatever equity they can. [NREI, Bloomberg, YF]