Eager Investors Disappointed By Small Number Of CMBS-Related Foreclosures
One of NoVa's largest office parks, the 2.5M SF Skyline campus in Fairfax County sold at auction for $200M in December after occupancy fell to 40% and Vornado went delinquent on the property's loans. This property, once valued at $680M, serves as a big warning sign for assets with expiring 2007 CMBS loans, but its fate may be more of an exception than the rule.
The story of Skyline has become increasingly common as tenants flee suburban office campuses for urban transit-oriented buildings. A wave of maturing, 10-year commercial mortgage-backed securities loans issued before the financial crisis has pushed the delinquency rate in the DC area up from 6.5% to 14.5% over the last 12 months. While this phenomenon is creating problems for some landlords, most investors, brokers and researchers agree it could be much worse.
Everyone saw the wave of maturities coming, said Sean Barrie, research analyst for CMBS tracking firm Trepp, and there has been much more discipline in the market than during previous distressed asset crises.
"I don’t think we’re at a crisis level at all," Barrie said. "With the delinquency rate on the rise, a lot of people did expect this and were bracing for it with the debt from pre-crisis coming due. Though the delinquency rate has increased constantly, it has not been as bad as it could have been."
Real estate veterans who have endured decades of ups and downs remember the savings and loan crisis of the late 1980s, which led the Resolution Trust Corp., a government-owned asset manager, to foreclose on $394B worth of assets between 1989 and 1995.
During that period, landlords were quick to give up on their distressed assets and cut their losses by selling at low values, Cushman & Wakefield's Eric Berkman said, but this current surge of delinquencies feels different.
"This is nothing like the '90s, where there was a massive capitulation," Berkman said. "We’re nowhere near that. Everybody thought the same thing would happen this time. People put funds together to buy CMBS loans and what happened is everybody learned from that mistake and said 'if we just waited we could have recovered the value.' That’s what you’re seeing this time around, more discipline in the selling of assets."
For the investors eager to scoop up these assets at auction for pennies on the dollar, the relatively small number of foreclosures has come as a disappointment. McDermott Will & Emery partner Daniel Martin represents many of these New York investors, and he said there was a strong appetite for a big wave of distressed asset sell-offs like the aftermath of the savings and loan crisis.
"A lot of people wish that would happen again," Martin said of the foreclosure wave in the '90s. "To a lesser extent the same thing happened eight to 10 years ago. I represented a lot of investors and lenders who were willing to lose a ton of money and then make a ton of money by buying into the capital stack, taking control of asset and repositioning it in a way that made tremendous sense. I’m certain there are a lot of investors that would love for that to happen again."
One of the most active DC-area investors in suburban properties, Finmarc Management, has acquired nearly $300M of assets in the last two years. Last spring it bought a 26-property office portfolio from First Potomac Realty Trust for $96M and last month it bought one of NoVa's largest industrial parks for $58M. With the company still in buying mode, Finmarc principal Neil Markus said he has been keeping a close eye on foreclosures as a way to acquire properties at low values.
"We really haven’t seen that massive pipeline of assets being foreclosed on," Markus said. "I think a lot of them have been refinanced, some of them the rents have crept up a little and saved people."
Lower interest rates have allowed borrowers to refinance and for those who cannot cover the whole capital stack, there have been opportunities for mezzanine debt and preferred equity, Martin said. He also attributes the surprisingly low number of distressed assets to Obama-era financial regulations that have forced more disciplined lending behavior.
"To a certain extent, it's not going to happen like in the '90s," Martin said. "Not even like eight years ago, because lending standards got more stringent after the recession. With the next coming wave, you’re going to see fewer distressed assets."