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CRE Finance World, Summer 2012

The Quake Is Over, but the Aftershocks Are Darn Persistent possibilities (new property value records nationwide, peak-year- 4 The chart only covers the conduit (2000–2008 vintage) universe of style aggressive lending). But the damage — once seen to be a approximately $659 billion outstanding as of January 1, 2009. Large generational opportunity for distress buyers — appears to have loan floaters, fusion, and other non-conduit-style CMBS are not included been largely contained through the collective efforts of concerned in our analysis. market constituents. PPR’s base forecast suggests elongated 5 For the conduit universe, there remain $530 billion in loans that require paths to de-leveraging across the lending space and sustainable refinancing within the next six years (based on current balance). lending volumes consistent with long-term, slow-growth econom- ics. That was one powerful earthquake, and it will take longer than 6 Only about one-third of defaulted loans have been resolved to date; usual to dig our way out. therefore, realized losses are understated relative to the known default population. As of April 2012, approximately $53 billion in defaulted Stephen Miller is Director of U.S. Capital Markets, Debt and Risk Management conduit loans remain unresolved. We define default as D90 payment Research, for Property & Portfolio Research, Inc. Steve is responsible for status or worse. the firm’s risk management advisory practice, which focuses on credit 7 For example, the average time from default to liquidation is approximately default analytics, capital formation, credit risk exposure measurement and 17 months. management, market pricing and liquidity, and lending activity. PPR tracks and forecasts commercial real estate loan performance across all sectors, 8 Much of the risk is concentrated in the 2006 & 2007 vintages, which including CMBS. Steve and his team have published numerous papers represent approximately 47% of the total CMBS market outstanding regarding credit performance in the current cycle, including early identifi- balance. cation and quantification of refinance risk as a significant driver. 9 We define the refinancing gap as the difference between scheduled Suzanne Mulvee, CFA, is a senior real estate strategist at PPR, where she maturing loan balance and the potential proceeds from a newly originated designs strategies for investing across the U.S. apartment, office, retail, loan, i.e., the take-out proceeds offered by the broad lending market. and warehouse property markets. She works to customize PPR’s core We differentiate this view from an extension framework, whereby the research to suit specific investment criteria and helps clients to communi- “proceeds” are more generous for a borrower current on payments. PPR cate portfolio performance and forward-looking strategies to stakeholders. released the white paper, “The ‘Capital Gap’ in Commercial Real Estate,” Mulvee specializes in research and forecasting of the performance of retail in May 2009 (Fitzgerald, Miller, Myers), that suggested the long-term assets across the United States. issue for commercial real estate loans in this downturn would be the take-out of balloon balances on maturing loans. Analytical sequel papers 1 In this case, we are referring to the 2000–08 vintages of the conduit — “GASP (Government Alphabet Soup Program) —TARP, TALF, PPIP, universe only (approximate balance of $528 billion) as of March 2012. PPIF, and So On” (Miller; May 2009), “Field of Dreams — GASP Part 2 Note that these projections are highly contingent upon special servicer II (Can the Plan Work?)” (Miller; June 2009), and “GASP III, The Soup strategy on workouts and liquidations. The loss figures represent PPR’s Kitchen: Can The Ailing Commercial Real Estate Market Be Nursed baseline views, which suggest fairly aggressive extension strategies for Back to Health?” (Miller, Myers, Fitzgerald, Li; December 2009) — laid borderline loans; users of the CompassFLEX product can turn these out this issue from a broad market perspective, including potential loss dials to determine loss estimates using their own view of how special consequences under different strategies and actions taken by regulators, servicers will address these issues. lenders, and borrowers. 3 PPR’s projected losses under particularly adverse economic scenarios, 10 Refinance risk under our base case scenario elevates projected lifetime labeled “severe recession/recession” in the chart, are substantially losses approximately 25% to 30%. Historically, under more adverse higher than projected losses for the base case scenario over the majority economic scenarios, the incremental risk impact from refinance risk has of the last three years. This difference has narrowed dramatically in been in excess of this range. Currently, the incremental impact under the last two forecasts, as PPR has reduced its outlook on the potential PPR’s recession scenario is similar to the base case scenario impact. magnitude of severity in a recession scenario. A significant dampener on 11 2006–07. potential additional commercial real estate losses is the limited amount of supply introduced in this cycle. 12 Loans subject to a 2012 maturity date with a balloon balance, including extended maturities from previous years. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 53


CRE Finance World, Summer 2012
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