INVESTMENT BANKERS WERE EXPECTED TO bring $8 billion to $12 billion in commercial-mortgage-backed securities to market in March, according to the Barron's/John B. Levy & Co. National Mortgage Survey of participants in the market for CMBS and individual loans on commercial real estate.
Despite the recession, delinquencies in commercial mortgages continue to run surprisingly low, though they have edged up to 1.55% in late February from 1.5% at the end of January and 1.37% at year-end 2001, according to Darrell Wheeler, director of CMBS research at Salomon Smith Barney.
Multifamily loans, long thought to be the safest in the business, don't enjoy the lowest delinquencies; that honor belongs to the presumably riskier office sector, at 0.53%. While multifamily delinquencies at 0.79% have been stable, the sector — especially top-of-the-line, Class-A apartments — is suffering from overbuilding.
“I don't know of any major multifamily market that isn't experiencing some rent concessions,” says Adrian Corbiere, senior vice president at Freddie Mac.
Meanwhile, delinquencies in the troubled hotel sector have risen to 6.07% from 4.86% at year-end.
Clearly, rising delinquencies are weighing heavily on lenders' minds, and they are lowering the maximum loan-to-value ratios. An insurance company that once might have offered a loan up to 75% of an office building's value has now reduced leverage to the 65% to 70% range on select properties. As a result, borrowers seeking leverage in the 50% to 65% range may be faced with a variety of lenders offering 10-year fixed rates as low as 6.60%, or the rate on Treasuries plus 1.75%.
Terrorism insurance issue lands in court
In late February, the nation's largest shopping center, the 2.8 million sq. ft. Mall of America outside of Minneapolis, became the focus of a legal skirmish. Owner Simon Property Group, the nation's largest shopping center REIT, provided a new insurance policy on the property that excluded coverage for terrorist acts. Loan servicer GMAC Commercial Mortgage determined that a policy covering terrorism up to $100 million was available at a cost of $750,000, which it intended to buy for the property and charge to Simon Properties.
| Selected CMBS Spreads (in basis points, or hundredths of a percentage point) | Whole Loans (Interest rates) | |||||
|---|---|---|---|---|---|---|
| To 10-year U.S. Treasuries | Term of Loan | Prime Mtge. Range 03/04/02 | Prime Mtge. Rate | Prime Mtge. Range 02/04/02 | ||
| Rating | 03/04/02 | 02/04/02 | ||||
| AAA | 115 - 116 | 120 - 122 | 5 years | 6.37 - 6.47% | 6.42% | 6.56 - 6.61% |
| AA | 132 - 135 | 137 - 140 | 7 years | 6.90 - 7.00 | 6.95 | 7.00 - 7.10 |
| A | 151 - 154 | 160 - 163 | 10 years | 7.05 - 7.15 | 7.05 | 7.13 - 7.18 |
| BBB | 195 - 200 | 195 - 200 | 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. | |||
| BB | 525 - 550 | 550 - 575 | ||||
But Simon obtained a temporary order blocking GMAC from paying the premium on the terrorism policy and from taking action against Simon for failure to purchase the policy. Although this is the first visible high-level case, there are sure to be others.
Meanwhile, the Government Accounting Office, an investigative arm of Congress, released a report in late February stating that terrorism insurance is “disappearing, particularly for large businesses and those perceived to be at risk.”
A new report from Moody's Investors Service builds a framework for analyzing the impact of terrorism insurance. It suggests that mortgage securities backed by a broad diversity of properties and buildings that don't fall into the “trophy” category will probably be mildly affected, if at all.
Large, single-property securitizations would require either extensive terrorism insurance or sharply increased subordination levels, which would raise the cost of mortgage financings. Existing single-asset securitizations on these trophy properties could face significant rating downgrades if adequate terrorism insurance isn't provided.
Prior to Sept. 11, standard, all-risk insurance policies on buildings included terrorism coverage. Now some insurers are again offering coverage, but they're defining terrorism more narrowly. Some new policies include coverage of plane crashes but exclude damage from chemical and biological agents, such as anthrax. Whether terrorism insurance is needed at all and — if so — how much, is a question that the courts ultimately will decide.
John B. Levy is president of John B. Levy & Co. Inc. (www.jblevyco.com), Richmond, Va., © Dow Jones & Co. Inc.