Barclays Capital reports that June CMBS conduit liquidations hit the new high of more than 450 deals worth nearly $1.9 billion, an increase that bodes well for special servicers of these portfolios.
Previous increases in the volume of monthly liquidations both in recent months and in 2010 had not exceeded $1.4 billion.
Analysts view the overall higher liquidation volume as “a positive for the CMBS universe” because finally servicers are able to clean up the books, have a lower asset count per asset manager, and concentrate on solutions that may have a bigger impact on the trusts.
Higher liquidation rates also help reduce delinquencies and trading uncertainty, “which is very important now, given recent higher spread volatility,” analysts said.
In June, a higher concentration of sales of large size loans combined with the inclusion of auction sales of pools of small balance loans, along with the use of auctions as a disposition method also significantly influenced the increase of the liquidation volumes.
For example, the June 2011 remittances included the $112 million Chapel Hills Mall, which was part of the Red Roof portfolio liquidation, and the liquidation of the 200 South Wacker Drive property at the “better than expected” resolution of $95.5 million supported by the Zell Credit Opportunities’ $117.8 million bid.
But since most of the loans liquidated in June had smaller balances, Barclays’ analysts see June’s higher liquidation volume as a “trend likely to prevail in the near term.”
The heightened liquidation volume was to be expected given the size of the special servicing bucket that had built up, analysts said. Currently, conduit loans totaling $77 billion are in special servicing, making up about 13% of the outstanding conduit universe, which has been shrinking in the past couple of months due to the higher volume of dispositions driven by a favorable lending environment, low interest rates and cap rates that attract buyers. “As a result, many assets that had been sitting on special servicing books for years and were hard to sell even a year ago are now being disposed.”
A higher share of distressed asset dispositions by special servicers, among other factors, also leads to overall lower index prices for the broader commercial real estate market as confirmed by Moody’s CRE index.
In April the REAL Commercial Property Price Index fell 3.7% to 97.96 “the lowest level since the inception of the index” Moody’s said. The agency reported that prices are at 48.9% below the peak levels.
An indicator of coherence in the CRE market performance, according to Moody’s, is that for 17 consecutive months distressed sales comprised at least 20% of the repeat sales transaction volume where prices of distressed transactions “continue to bounce around the bottom,” while major asset and average market prices have recovered over half of their post peak losses.
Moody’s warned however that despite a recent increase in the CRE transaction volume, “the large share of distressed transactions precludes a broad market recovery at this time.”