CMBS Market Will Impact landlords

Securitized office mortgages, which initially were somewhat insulated from the market distress, are increasingly being dragged down as well.

Deteriorating office loans were the impetus behind big spikes last month in special-servicing and delinquency rates for commercial MBS loans.

The percentage of CMBS loans in special servicing, by balance, jumped to 11.7% at the end of May, from 11.3% a month earlier, according to Trepp. Meanwhile, the 60-day delinquency rate soared by 49 bp, to 7.97%, Fitch reported. The increases dashed hopes in April that the measures of credit deterioration were starting to peak.

The amount of office mortgages in special servicing climbed by a net $2.3 billion last month, or 12%, to $21 billion. That accounted for three-fifths of the overall $3.7 billion increase in special-servicing volume. For the first time in this cycle, office loans are the largest category of loans in special servicing, exceeding retail mortgages, whose total declined by 3.4%, to $20.2 billion, because some loans to General Growth Properties were removed after modifications.

And the actual amount of office loans in special servicing is much higher. Late in May, a massive $4.9 billion mortgage was transferred to special servicing, according to Fitch. That transfer occurred too late to be included in the servicer reports that Trepp uses to compile its figures. Also, about $800 million of a $2.7 billion loan to Beacon Capital Partners hasn't yet shown up in the figures. Counting those loans, the amount of office mortgages in special servicing skyrocketed by $8 billion, or 43%, from the end of April, to $26.7 billion.

Office loans also drove the rise in delinquencies. Fitch's index now includes $6.6 billion of office mortgages, up $1 billion, or 19%, from the end of April. The agency said 44 office loans were classified as 60 days past due in May, including 14 with balances exceeding $20 million.

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Office mortgages are the dominant category of CMBS loans, accounting for $213.6 billion, or 30.1%, of the $709.4 billion of outstanding mortgages. But so far during the downturn, they have represented a disproportionately small portion of the loans in special servicing. The reason: Office buildings tend to have long-term leases that have provided some protection from the struggling economy.

But Trepp and Fitch have long predicted that office mortgages would face growing distress as leases rolled over. Now that is coming to pass.

"As expected, office-loan delinquencies have begun to increase and will continue to rise well into next year," said Mary MacNeill, a Fitch managing director. "Landlords are being pressured by tenant downsizing and must offer significant concessions and reduced rent to maintain their existing tenant bases."

Office loans now account for 25.4% of the loans in special servicing, by balance, up from 17.8% at the end of last year. And 9.8% of all securitized office mortgages are in special servicing - almost double the 5.5% rate at yearend.

The $4.9 billion mortgage that was transferred to special servicing in late May is backed by office properties that a Blackstone Group fund assumed via its $39 billion takeover of Equity Office Properties in 2007. The loan, which had an original balance of $6.9 billion, was securitized via a stand-alone deal (GS Mortgage Securities Corp. II, 2007-EOP).

The Blackstone loan and the $2.7 billion Beacon loan, which is backed by office properties in Seattle and Washington, D.C., are still current on their payments. But Fitch noted that if the loans become delinquent, the office delinquency rate would soar by 400 bp, from the current 4.59% level, and the overall delinquency rate would climb by 135 bp.

The largest office mortgage classified as 60-days delinquent in May was a $380 million loan to Beacon on the 1.5 million-square-foot Columbia Center complex in Seattle. Morgan Stanley securitized that loan via a $2 billion pooled deal (Morgan Stanley Capital I Trust, 2007-HQ12).

Other big office loans that turned delinquent included a $181 million mortgage on the so-called DRA-CRT Portfolio 1, which encompasses 16 properties in Florida, Maryland and North Carolina, and the $165 million senior portion of a $200 million loan to Maguire Properties on the 566,000-sf building at 550 South Hope Street in Los Angeles. The DRA-CRT loan was securitized via a $2.7 billion pooled offering (J.P. Morgan Chase Commercial Mortgage Securities Corp., 2005-CIBC13). The Maguire loan was securitized via a $7.6 billion offering (GS Mortgage Securities Trust, 2007-GG10).

The $3.7 billion net increase in special-servicing volume last month was the largest since the $4.3 billion spike in February, reversing a downward trend. The number of loans in special servicing rose by 175, or 4%, to 4,627 - the biggest jump since the 341 increase in February.

The delinquency rate also rose for other property types last month, but to smaller degrees. The rate climbed to 18.63% for hotel loans (up 21 bp), 13.65% for multi-family mortgages (up 5 bp), 6.03% for retail loans (up 20 bp) and 5.07% for industrial loans (up 47 bp).

The overall delinquency rate has climbed virtually nonstop from a low of 0.27% in January 2008, reaching levels not seen since Fitch began maintaining the data on a monthly basis in 2004.

The delinquency index tracks loans in U.S. securitizations rated by the agency that are overdue by at least 60 days or in foreclosure. At the end of May, 2,938 loans totaling $35.4 billion were in that category - up from 2,885 loans totaling $33.5 billion a month earlier. Another $4.2 billion of loans were delinquent by 30-59 days at the end of May, up from $3.6 billion a month earlier. Overall, Fitch rates $443.8 billion of U.S. CMBS transactions backed by about 40,000 commercial mortgages.