What's the latest view on shopping centers? “We're choking on retail” was how one institutional lender described his commercial mortgage portfolio and, according to the Barron's/John B. Levy & Co. National Mortgage Survey, that could well be considered the theme of the month. Both institutional lenders and CMBS originators are carefully monitoring their retail exposure. As Sun Life of Canada's Tim Monahan said: “We're trying to reduce our retail exposure by limiting new loans to 65% of value or less.” Another institutional survey member noted that his firm had received more notices of bankruptcies and store closings in the past 45 days than since the real estate depression of 1990.
Nevertheless, institutional and CMBS originators are still extremely interested in shopping centers anchored by grocery chains that are dominant in their market. Super-regional malls also are on the list of loans to acquire, while unanchored centers and special-purpose retail buildings are virtually impossible to finance in many markets.
In the past, the Barron's/Levy survey relied solely on comments from more than 30 participants in the whole-loan and CMBS arenas. In an effort to give a more well-rounded view, we will now talk to a number of developers and commercial mortgage borrowers each month.
While the retail sector is clearly under attack, apartments continue to motor along virtually unscathed. Mortgages are available and highly sought after at spreads that are at least 0.25% lower than loans available for offices, warehouses and grocery-anchored retail. As Charley Kushner of Kushner Cos. said: “As pessimistic as people are about the economy, that pessimism doesn't apply to multifamily.”
Indeed the optimism for the multifamily sector is based on performance. According to the Giliberto-Levy Commercial Mortgage Performance Index for the 12 months ending Dec. 31, the apartment sector led all other property types with credit losses of an infinitesimal 0.04%, a level only half of the Index's aggregate loss of 0.08%. To no one's surprise, retail showed the highest losses at 0.10%, with significantly higher losses sure to be reflected in the coming months.
Over on the CMBS side, trading in the secondary market has clearly picked up from earlier in January. Nevertheless, one major trader still chose to describe the market as “thin and choppy.” Most CMBS bonds are still trading at a premium due to falling interest rates, but the view of premium bonds has become distinctly more positive. Though most insurance companies seem to avoid them, money managers are not as timid lately. Recently, money managers including Putnam and BlackRock were active in acquiring triple-A rated premium bonds.
As we went to press, a $1.2 billion conduit transaction came to market in February. Nicknamed TOP, an acronym for Tier-One Paper, this transaction combined collateral from Bear Stearns, Wells Fargo, John Hancock, Morgan Stanley and Principal Life.
In late January, underwriters led by Deutsche Bank brought to market a $477 million credit-tenant-lease (CTL) transaction backed by mortgages on 120 properties. In spite of the fact that the triple-A tranches were guaranteed by a large triple-A bond insurer, MBIA Insurance Corp., the transaction was at best a struggle. In the past, the market hasn't taken kindly to CTL transactions as several previous deals have been downgraded. Additionally, 75% of the collateral in the pool consisted of retail properties, and the top five tenants represented in the pool were all retailers. As a result, the A-1 class, rated triple-A, which originally was offered at a price talk of interest-rate swaps plus 0.54%, was finally priced at a whopping swaps plus 0.75%. The offering's A-2 class, again rated triple-A, widened from 0.85% to 1.10% over interest rate swaps.
While most CMBS participants are talking about industry consolidation, an old name is about to resurface. Nomura Securities, thought by some to have virtually invented the conduit market, is planning to re-enter the loan origination business, which it left in late 1998 amid a flurry of losses. Headed by David Jacob, the firm is seeking to hire both bankers and traders.
John B. Levy is president of John B. Levy & Co. Inc. (www.jblevyco.com) in Richmond, Va. © Dow Jones & Co. Inc., 2001.
Barron's/John B. Levy & Co. National Mortgage Survey
|To 10-year U.S. Treasuries|
|AAA||125 - 127||137 - 139|
|AA||143 - 147||154 - 157|
|A||158 - 162||169 - 171|
|BBB||225 - 235||230 - 240|
|BB||525 - 540||525 - 540|
|Term of Loan||Prime Mtge. |
|Prime Mtge. |
|5 years||6.84 - 6.99||6.89||6.95 - 7.05|
|7 years||7.23 - 7.38||7.28||7.25 - 7.35|
|10 years||7.33 - 7.48||7.38||7.30 - 7.40|
|For loans of $5 million and up, on amortization schedules of 25-30 years, that can be funded in 60-120 days, with 0-1 point.|