Wednesday, June 23, 2010

Atlanta leading nation in problem CMBS loans

Friday, June 18, 2010 | Modified: Monday, June 21, 2010, 2:42pm EDT

Atlanta Business Chronicle - by Douglas Sams Staff Writer

Metro Atlanta has 226 problem CMBS loans — the highest total of any U.S. city.


In May, metro Atlanta had more CMBS (commercial mortgage backed securities) loans in special servicing than Phoenix (215), Dallas/Fort Worth (210), New York (198) and Houston (169), according to Trepp Inc., the New York company that tracks troubled CMBS loans.

A special servicer handles problem CMBS loans, which can include the possibility of imminent default on the debt.

Metro Atlanta held this dubious ranking for much of the past year, according to Trepp. And the fact that Atlanta has more loans in special servicing than any other city is yet another sign the region is a poster child for risky real estate deals, insiders say. Georgia already leads the nation in shuttered banks, many the victims of toxic development loans.

The issue took center stage at an Atlanta Real Estate Investment Advisory Council meeting June 10 that drew the biggest CMBS players in the field, including Berkadia Commercial Mortgage LLC (partly owned by Warren Buffett’s Berkshire Hathaway Inc.), Fitch Ratings and Atlanta-based Trimont Real Estate Advisors.

In Atlanta, 98 loans secured by apartment complexes are in special servicing, followed by 69 loans secured by shopping centers, 46 by office buildings and 28 by hotels, according to data provided by Transwestern Commercial Services.

The total balance of all the loans is $9.3 billion, according to Transwestern.

Atlanta ranks eighth nationally in the loan volume in special servicing, according to Trepp.

The CMBS issue stems from weak underwriting standards in the boom years between 2005 and 2007 and a 30 percent to 50 percent crash in property values since then. Many of those loans are now under water, and many building owners have less cash flow to work with.

“The No. 1 issue is that values have fallen as vacancy has risen,” said Jay O’Meara, a senior vice president with the commercial real estate giant CB Richard Ellis Inc.

“The average loan to value was up to 80 percent. When many owners didn’t put a lot of equity into their deals, there wasn’t much of a margin for error.”

Nationally, much of the concern in on the nearly $70 billion in highly leveraged short-term loans originated at the height of the market, according to an analysis by Deutsche Bank.

Many of those loans start to mature this year.

Since 2005, CMBS debt helped finance the acquisition of downtown’s Peachtree Center, and Midtown’s One Peachtree Pointe and Campanile building.

In recent months, each of the buildings has been transferred to special servicers.

One Peachtree Pointe, developed by John Dewberry, was up for foreclosure. It has so far avoided going back to the lender.

Wells Fargo & Co. foreclosed upon the Campanile building earlier this year.

The latest notable Atlanta office building in special servicing is Powers Ferry Landing East. A nearly $50 million CMBS loan secured by the office complex was transferred to the special servicer LNR Partners Inc. June 11, according to Fitch Ratings.

Trouble on the horizon

There will be more CMBS woes to come. Many borrowers will be unable to get refinancing without injecting a large amount of equity. And, many are going to be unwilling to infuse equity into a loan that is already under water, according to Deutsche Bank.

Nationally, about 4,560 loans have been transferred to special servicers as of May, representing $81 billion in loan volume, according to Trepp.

The problems with CMBS speak to broader challenges facing a $3.4 trillion U.S. commercial real estate market suffering from high vacancy, falling rental rates and a weak job market.

CMBS represents only about 25 percent of the commercial real estate debt market.

Some help available

Special servicers have been more apt to foreclose on distressed, signature commercial properties.

So far, regional lenders have shown a willingness to keep non-peforming loans on their balance sheets, hoping that the economy will improve and that the properties will bounce back.

The office sector remains the most vulnerable.

The job market is not expected to improve much this year, putting more pressure on building owners.

In the Atlanta office sector, about 10 percent of CMBS debt is being handled by special servicers — higher than any other city in the Southeast, O’Meara said.

Real estate problem

Cities with the most CMBS loans in special servicing

Atlanta 226

Phoenix 215

Dallas/Fort Worth 210

New York 198

Houston 169

Source: Trepp Inc.