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CRE Finance World, Autumn 2012

A Recovering Office Market May Not Move the CMBS Office Credit Needle Chart 4 Table 1 Office Square Footage Per Worker Office Loans With NOI Declines Source: CBRE The U.S. has gone through two recessions over the past 10 years, © Standard & Poor’s 2012 and office fundamentals suffered with the economy. National office rent growth came to a virtual standstill during this period, and rents With Minimal Rent Growth, NOI Drops are currently about where they were in 2002 (see chart 5). Office For Over 50% of Office Collateral lease terms usually span between five years — the typical lease Our review of the CMBS office loans for which servicer-reported term — out to 10 years, and rents for longer-term leases signed 2011 financial performance was available revealed declines in NOI in 2002 haven’t grown much to date (about 3%), while rents for for more than half of the collateral (by principal balance) between leases signed in 2007 are about 10% lower. When factoring in the 2010 and 2011 (see table 1). For this group of loans, NOI dropped rise in expenses over both periods, it’s easy to see why office NOI almost 14% over the period and approximately 4% since securitization. has fallen. Minimal rent growth, coupled with high vacancy rates, For the total reporting office population (which includes loans that has translated into less-than-spectacular office revenues and reported NOI increases as well), NOI decreased by 0.3% from NOI. In our view, NOI may not grow significantly until 2015, when 2010 to 2011. leases signed at the market’s trough in 2010 begin to benefit from rollovers to higher rents. Our NOI review included only those loans that had servicer-reported NOI data for full-year 2010 and 2011 and at securitization — about three-quarters of the $130.4 billion in total rated CMBS office collateral outstanding. Approximately 54% of the sample, or 2,282 loans totaling $51.9 billion, reported NOI declines between 2010 and 2011. The average NOI decline was 13.9%. Of the loans that experienced declines, 86% came from the 2005, 2006, and 2007 vintages. A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 19


CRE Finance World, Autumn 2012
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