CMBS Securitizing Riskier Deals?

Fitch Ratings warns that hotel/motel loans and interest-only deals were up this year in the Commercial Mortgage-Backed Securities market.

"As issuance volume grows, recent vintages have become more volatile," Fitch Ratings Senior Director Patty Bach said during a conference call with reporters and analysts on Dec. 13. Bach pointed to a surge in hotel lending, which is regarded as riskier than property types that get their cash flow through long-term leases, not overnight visits.

Hotel loans accounted for 16.3% of all commercial mortgage-backed securities issued in 2006, according to Bach, and for the first time surpassed the multi-family assets in CMBS. The share of hotel properties has been on the rise in CMBS since hitting a post 9/11 low of 2.3%.

Interest-only loans are another red flag, because borrowers who use such instruments may be exceedingly vulnerable to economic downturns. Bach says that Fitch has seen the percentage of interest-only loans in multi-borrower deals rise in 2006 and predicts that the number will rise in 2007, too, although the company does not have precise data on the issue.

Hotels and motels are certainly more sensitive to downturns in the national economy, but the impact of interest-only loans seems a little overblown. If we assume an 80% LTV and a 7.5% interest rate, the LTV five years out is only down to 75% if the value remains steady and the amortization is 30 years.

There is some good news in the report:

Fitch reported an upgrade-to-downgrades ratio of 35.5:1 for multi-borrower CMBS deals through the first nine months of 2006, and 29:1 for large-loan, floating-rate transactions.

Which may explain why we're seeing lower spreads on conduit loans.

 
Arizona Top State In Nation for Job Growth

Per Blue Chip Job Growth Update:

Among metropolitan markets with a work force of more than 1 million, the Phoenix area retained the top position in nonagricultural employment for October 2006 over October 2005, with a 5.2 percent gain, representing 94,500 jobs. The New Orleans area bounced back from the post-Katrina doldrums to rank first among metropolitan markets with fewer than 1 million workers, posting a 12.6 percent gain, or 49,700 jobs.

Here's a graphic look at the year over year job growth rate since 2002:

 
Equity Capital Lining Up to Invest in Commercial Real Estate

Interesting article from CoStar on the amount of equity capital pouring into the market:

Hungry for the hefty returns that commercial real estate has consistently returned over the past five years, investors are expected to pour a staggering $55 billion into private equity real estate funds by the end of this year, representing a 48.6% increase over last year's $37 billion, according to Private Equity Real Estate magazine. When you factor in debt financing, those funds have a buying power greater than $160 billion.

Shorenstein started fundraising earlier this year for its eighth -- and by far largest -- investment fund, Shorenstein Realty Investors Eight LP. According to Douglas Shorenstein, chairman and chief executive of the company, the fund was substantially oversubscribed and had to turn away investors before closing out the fund in September, having raised $1.1 billion in equity commitments, including a $100 million investment of Shorenstein's own money.

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