Securitized hospitality loan delinquencies have been the highest in the CMBS market and tend to be the most volatile but one advisor, Mission Capital principal David Tobin, sees a relative improvement in them.
Multifamily, the property type with the next highest delinquency rate in the market, just saw a big jump in late pays (albeit one driven by large loans) according to Moody’s Investors Service. But the hospitality delinquency rate improved more than any other in 2010 “because where multifamily values reset every year hospitality values reset every day,” Tobin said.
Tobin not only makes a case for hospitality but his description of multifamily dynamics today also makes a case for careful and selective investment in that area based on how well a property is maintained/updated or based on the ability to add enough constant maintenance/updating to get it back to a point where it can build value.
“The trouble with the multifamily loan market is that within the CMBS world typically you have a lot of B and C quality property and you have B falling into C and C falling into D because when you skip a [furniture, fixtures and equipment] improvement cycle—meaning you don’t change carpet, paint, update the apartment/stay competitive with the six other multifamilies on your block, your tenancy drops a notch and your rents drop a notch,” he said, noting the difference in the nature of income from that property type (rents reset yearly) compared to retail, office and industrial (five and 10 year leases).
“Multifamily, the minute it misses an FF&E cycle, the property value and the cash flow are impacted and multifamily is typically very thin to begin with,” he said, noting the risks in the property type that account for its volatile nature. “It has the lowest cap rates and the thinnest coverage because it is among the most liquid of property types, but that cuts both ways.”
When sizing up loans in the CMBS market in general, “I think it comes back to asset quality,” said Tobin, whose company specializes in areas that include performing, subperforming and nonperforming commercial/multifamily mortgage assets. “CMBS loans are very binary...either one is willing to invest in the property and upgrade it or he’s not. If the borrower feels that he is out of the money...then the borrower walks. There’s typically not a personal guarantee. Unless there is a light at the end of the tunnel on commercial real estate property the borrower walks. There’s no hook.”
Other potential upsides Tobin sees in the market include a way to see possible opportunity in the increase in maturities anticipated this year. “People look at this as sort of a glass half empty, I sort of see that as a glass half full,” he said. “The CMBS programs that have started over the last 12 months at basically every major bank are in response to that expected maturity avalanche and they view that as an origination opportunity.
“Given the overleverage and the problems inherent in the space it’s going to be all about rate and CMBS, historically, offers the most competitive [relative] rate.”
Barring the possibility of increased employment woes that as previously reported on this publication’s website could hurt core retail/industrial/officer property types, Tobin thinks the CMBS market is going to be self-correcting and this year could turn out to be one with relatively strong origination.
“The staff at CMBS special servicers has risen to meet the challenge,” he said, noting that they are veterans of industry market cycles.
“They’ve seen this movie before.”