Thursday, May 14, 2009

The "Special Servicing" Problem

Following up on a post from a few days ago in which the general skyrocketing of delinquencies was observed, today I present an overview of some of the largest properties and loans that have recently been put into that very unenviable category of "special servicing." According to Trepp, in April a record $4.4 billion in loans were transferred to special servicers, bringing the total to $23.8 billion. Transfers occur when master servicers hand off loans to special servicers once they notice signs of trouble. Special servicers then attempt to work out the problem with the borrower and return the loan to normal status or negotiate a payoff. If that approach fails, the loan is liquidated and the proceeds are forwarded to bondholders.

Manus Clancy of Trepp had the following green shoots dousing words to say about the current environment: "People are starting to talk about the economy bottoming out, but commercial real estate seems to be lagging the rest of the economy - we're seeing an acceleration in problems. April was worse than March, and March was worse than February. There's cause for concern that each month is getting worse."

In terms of specific segments within CRE, the most pain is still seen in the multi-apartment properties. Loans on multi-family complexes account for 15.2% of the total balance of outstanding CMBS transactions, their share of the special-servicing units is more than twice as high: 32.3%. On the other hand, office mortgages are the slowest to react to a deteriorating market, and are underrepresented in the special-servicing pool. Their share is 17.1%, versus 30.1 % in the overall CMBS universe. This is primarily due to the longer-dated nature of office leases and the corporate backing behind contracts: it would not look good if Fortune 500 companies made financial blogs with disclosure that they were in dire need of lease renegotiation. However, all this means is that the pain in office properties (and especially for office-focused REITs) will be that much more pronounced once the bottom really falls of the office rent market within the next year.

As an indication of some of the larger loans in special servicing, I present the following chart which breaks down the key properties by segment and by entry date into special servicing.

hat tip A B and Trepp Sphere: Related Content
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