NEW YORK (12 October 2009)–The reprieve is over for U.S. CMBS as delinquencies resumed their upward trajectory to end the month at 3.58 percent, according to the latest Loan Delinquency Index results from Fitch Ratings. The hotel sector now leads as the property type with the largest proportion of delinquencies at 5.83 percent.
“The recent surge in hotel defaults is consistent with Fitch’s view that hotel property values will decline by as much as 50 percent from peak levels,” said Managing Director and U.S. CMBS group head Susan Merrick. “While budget hotels have fared best during the downturn, continued pressure on the luxury, resort, and gaming sub-sectors will likely push lodging delinquencies to approximately double that of the other property types.”
BLOGGER COMMENT: The biggest problem facing commercial real estate is the capital markets’ lack of liquidity. CMBS issuance went from $230 billion in 2007 to $12 billion in 2008 to less than a billion dollars YTD in 2009. Higher vacancies, higher operating costs and higher reserves can be built into financial models to determine an underwritten cash flow (UCF). We can apply a stressed interest rate and a higher than normal debt coverage ratio to the UCF to determine very conservative maximum loan proceeds. As delightful a geeky math exercise that might be… when there is no functioning capital market to provide liquidity, there are no transactions in some market segments especially hotels!
In the glory days construction loans on hotels were sized for a relatively easy takeout from a CMBS lender. What used to get easily financed by the voracious CMBS machine at 75-80% LTV/LTC now will only justify 40-65% LTC/LTV (lesser of) financing from long term investors such as insurance companies and pension funds based on the new ultra conservative underwriting standards. This makes commercial real estate a “rich man’s game” once again and will knock all the amateurs out of the business. For those with massive amounts of cash and a long time horizon this is the greatest opportunity to acquire multi-generational assets at a fraction of replacement cost. A stunning amount of assets will be lost by developers / investors that do not have the staying power to sustain losses (or have non-recourse debt and can painlessly give ’em back the keys).