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CRE Finance World, Autumn 2013

U.S. Conduit CMBS Update: Credit Metrics Were Stable in Third-Quarter 2013, but Transactions Remain Riskier Year-Over-Year Table 2 Changing Property Type Mix *Rated by Standard & Poor’s. Source: Trepp. Nationally, apartment performance has improved since the downturn, though rental growth has begun to slow somewhat; CB Richard Ellis Econometric Advisors projected 2.2% rent inflation in 2013 (as of the first quarter), versus a 4.2% gain in 2012 and nearly 5% growth in 2011. At the same time, apartment properties in most markets are trading at all-time-low market capitalization rates and at a wider margin versus rating agency capitalization rates. This creates the potential for a repeat performance for those properties securitized during the last credit cycle (at the end of second-quarter 2013, Standard & Poor’s multifamily CMBS delinquency rate was the highest of the five main property types at 11.25%). In addition, certain recent conduit transactions include some loans with higher CRE Finance World Autumn 2013 52 rating agency LTVs made to apartment owners who over the past several years either defaulted on loans, filed for bankruptcy, or both. Lodging exposures remained elevated At 15%, lodging collateral exposure thus far in 2013 is higher than the 9% concentration in all outstanding conduit deals. But despite relatively strong performance in the lodging sector, we consider hotel properties to be a riskier property type due to nightly room re-pricing as opposed to the long-term leases that characterize office, retail, and industrial assets. National revenue per available room (RevPAR) continues to rise, but has slowed in recent months. According to Smith Travel Research, national RevPAR in first-half 2013 advanced 5.6%, although May (+5%), June (+3%), and the first 28 days of July (+4%) displayed modestly weaker growth compared with earlier this year. Weak consumer spending is a potential headwind for the sector, while low supply is a positive. Hotel construction remains constrained in most markets, although one exception is New York City. Looking through credit cycles, our analysis considers whether the general trend in lodging performance to date through 2013 is sustainable. A drop in RevPAR can quickly stress a lodging property’s net cash flow and ability to cover debt service when it’s also burdened by relatively high fixed expenses. Consequently, to the extent that RevPAR appears to be outpacing historic growth rates and prior peak levels, we may use a RevPAR number that is lower than the most recent performance in our analysis. Retail assets are still the most popular Although retail concentration fell slightly versus 2012 vintage deals, it still remains the most popular asset class in conduit CMBS this year (32% of pools by balance). It is a positive sign that retail sales have increased over the past four months, although many large retailers have reduced their full year sales growth forecasts based on weak consumer spending. Top malls in primary locations continue to outperform secondary locations and smaller properties. E-Commerce growth is a medium- to long-term challenge for traditional brick-and-mortar retail--the U.S. Census Department reported that online sales grew 18% year-over-year during second-quarter 2013, more than four times the rate of non-auto overall retail sales, albeit from a smaller base. The debate also continues as to consumers’ preference for the ease and convenience of online shopping, versus visiting “destination” or “needs-based”


CRE Finance World, Autumn 2013
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