With the collapse of the World Trade Center and subsequent collateral damage to other properties, the CMBS market came to an abrupt halt. In its wake, there has been little talk about where the market is trading, and rather discussion about asset impact and deal exposure has surfaced.
Some issues, such as the recently priced GMAC 2001-WTC and Bank of America large-loan 7 WTC are the newest deals to be affected, but there are others such as the pair of World Financial Properties Tower B and D priced back in November 1996 and February 2001's Goldman Sachs One Liberty Plaza offering.
A recent press release by GMAC presents comforting news. According to the release, the loan is not in default, and sufficient funds should be available to cover the October 9th bondholder distribution. If not, the GMAC as servicer will advance on the October 8th distribution, with final review of the action being postponed until that date.
Final word about the fate of the Bank of America deal was not available, though insurance on both deals did not exclude acts of terrorism from coverage.
As far as deals coming to the market, timing remains elusive. The well-marketed COMM 2001-J2 conduit via Deutsche Bank and Bank of America was reportedly restructured to remove exposure to the Ocean Residences apartment complex at the southernmost tip of Manhattan in Battery Park.
A less notable deal, but one that priced last Wednesday in the midst of the turmoil, Freehold Raceway Mall, printed five basis points or so wider than guidance released prior to the terrorist activity.
The immediate future for the CMBS market is as debatable as the impact for the larger economy, but both bolsters and detractors of the industry have made some relevant points. Real estate valuation looks to come under pressure from a slowing economy, which was already underway prior to last week, mitigating the direct New York impact, says Joseph Philips of Morgan Stanley Dean Witter.
Michael Youngblood at BofA, however, believes that 30-day delinquencies will rise sharply as rents due in September in lower Manhattan will not likely be paid. Trepp Inc. estimates 332 securitized loans are backed by properties south of 14th street, totaling $5.4 billion. The distress should be short-lived though, as servicers make up for loss of or lack of payment and CMBS investors should not be duly affected.
The other large impact for the New York real estate market is the possible relocation of some large companies to other states. According to Bear Stearns, roughly 9-14% (10-15 million square feet) of the downtown office space has been destroyed and while the city had 20 million square feet of vacant space available, the space is not in large blocks and makes for poor operational logistics. The long-term consequence is a big unknown, but for the meantime large firms are setting up shop in nearby New Jersey and Connecticut.
Conversely, according to BofA's Youngblood, the demand for office space in the city may prove a positive impact for CMBS holders. Rents, which currently stand at $51.90 per square foot, should climb as new demand is expected to exceed the 4.3 million negative net absorption of the past two quarters. The increase in rents and decline in vacancy rates will "enhance the performance of securitized mortgage loans," and sustain the credit stature of the CMBS market.
Spread product widened on the heels of last Tuesday's events and CMBS was not immune to the larger-market trends. According to Trepp Inc., the 10-year triple-A spread widened as much as seven basis points to Treasurys from September 10th, but have tightened two basis points from those wides as of Wednesday, September 19th. Over the same period, spreads to swaps have come off 10 basis points or so to 54 basis points as of Thursday the 20th. Accordingly, lower-rated tranches suffered greater losses with as much as 20 basis points for triple-B classes versus the Treasury curve.
For the most part, dealers are upbeat on the sector. Once past the volatility, the sector should pick up better support, especially in the triple-As. Roger Lehman of Merrill Lynch related that prior to the attack, he was recommending an up-in-credit trade because of prospects of a slowing economy. If anything, the slowdown appears to have only accelerated that notion and the better protection of well-diversified conduits should attract interest.
Liquidity may have been spotty, but trading did occur in CMBS over the last week. Dealers report that current spread levels are attracting some buyers, though caution that current volatility may press spreads out a bit further. Note that coming into September, there were expectations for spreads to back-up into the low +50s basis points over swaps because of a bountiful supply calendar. The pipeline now remains questionable but holds some marquee conduits that may be eagerly sought after. Of note, a $1.3 billion issue via First Union and BofA and a Bear Stearns, MSDW $1 billion "TOP-4" both linger on the calendar, though there is no word on timing for any issue just yet. Limiting the prospects for coming deals, however, are the displaced rating agencies, which like other firms are seeking new homes in the New York area. - CC/IFR MortgageData