Big borrowers

The market for mortgages on commercial properties was chock-a-block with both action and anxiety in May, according to the Barron's/John B. Levy & Co. National Mortgage Survey of more than 30 industry participants. On the action side, the calendar was full of new securitizations, including two $1 billion-plus, single-borrower financings for Rockefeller Center and TrizecHahn. The anxiety stemmed from publicity detailing the impact of a slowing economy on real estate.

Demand for new mortgages has clearly ratcheted down a notch or two. Although interest rates changed little during May, they are still up more than a half-percentage point from their recent lows, causing many borrowers to take a wait-and-see attitude. As one institutional lender succinctly put it, “the market lacks energy.”

Spreads on individual mortgages were a little tighter in May on the order of 0.05-0.10 percentage points over benchmark rates. Borrowers were mostly attracted to floating-rate loans and five-year fixed-rate mortgages. Those willing to risk the uncertainty of floating rates can pick up financing in an attractive range of around 6%-6 1/2%. Five-year fixed-rate money is now available at 7%-7 1/4%.

In mid-May, the market for securities backed by commercial mortgages digested the largest single-borrower offering to date in the U.S. market a $1.4 billion offering from TrizecHahn. The loan was backed by 28 office properties. Attracting even more interest and significantly tighter spreads was a $1.2 billion securitization led by Goldman Sachs of the 10-building Rockefeller Center office complex in midtown Manhattan. The offering was oversubscribed with the $492 million A2 tranche finally pricing at a tighter-than-expected spread of interest-rate swaps plus 0.58 of a percentage point.

But the relatively good times and spread tightening that prevailed for much of May appeared to have hit a wall with the $1 billion offering from First Union Bank and Merrill Lynch based on 108 fixed-rate mortgages. Collateral for almost 34% of the underlying loans consisted of apartment buildings currently an attractive sector. But the market was underwhelmed. Underwriters had a hard time placing the short-term triple-A class A1 and the longer-term triple-A class A2. The deal was priced with the A2 class at interest-rate swaps plus 0.48 of a percentage point 0.02 of a percentage point higher than underwriting expectations. The A1 class priced at swaps plus 0.44 of a percentage point, 0.03 of a point wide of expectations. Analysts were surprised that underwriters were required to widen spreads so sharply, especially since Freddie Mac placed a $410 million order more than half of the combined A1 and A2 classes.

Today, the mortgage-securities market is not only about new originations. At the beginning of June, there were no fewer than four separate bid lists from owners of more than $575 million of mostly triple-A paper. The buyers were a mixed group, but perhaps the largest single buyer was Nomura Securities. Nomura recently stepped up its operations in the field after a long quiet period and, according to one analyst, is eager to show that it is back and intending to be a significant player again.

Investors in commercial mortgages seem fixated on the economy. Stories abound of rising vacancies and falling rents. Hotels and offices are the property types most likely to suffer, especially if the slowdown continues for a significant period. Meanwhile, multifamily loans are faring well. According to Adrian Corbiere, Freddie Mac's senior vice president for multifamily, “some rent concessions are appearing, and rental increases have virtually disappeared, but loan delinquencies are still at record low levels.”

John B. Levy is president of John B. Levy & Co. in Richmond, Va., www.jblevyco.com. ^©2001 Dow Jones & Co. Inc.

Barron's/John B. Levy & Co. National Mortgage Survey