Wednesday, August 17, 2016

Office Properties Largest Contributor to First Half CMBS Defaults

Cumulative CMBS loan default rates continued to trend down, dropping to 12.9% at half-year 2016 compared to 13.3% at mid-year in 2015. The combination of steady issuance levels and overall improved property fundamentals supported the decline in loan defaults, according to Fitch Ratings.

In the first half of the year, 106 loans, totaling $1.44 billion newly defaulted during their loan term. The average size of the newly defaulted loans was $13.5 million.

About three-fourths of the loans that did default during their terms were for loans made in 2006 and 2007, at the last real estate peak prior to the Great Recession.

Among property type, office properties were the largest contributor to new defaults by loan balance. Not surprisingly, office loans also accounted for the highest portion of CMBS loans made in 2006-’07.

Cumulative Default Rate by Property Type

Type Issuance ($ Bil) Default (%)
Health Care $6.1 23.9%
Hotel $72.1 16.9%
Industrial $39.2 14.7%
Multifamily $120.5 16.1%
Office $204.6 12.7%
Retail $222.9 11.0%

The four largest defaults in the first half were as follows.

--$150 million James Center, Richmond, VA;
--$116.6 million Fair Lakes Office Park, Fairfax, VA;
--$68 million Minneapolis Airport Marriott, Bloomington, MN; and
--$55.9 million DHL Center, Breinigsville, PA.

The James Center, now REO, is a 1 million-square-foot office property in downtown Richmond. The property consists of three high-rise office towers. As of February 2016 the property was approximately 63% occupied, according to Fitch data.

Fair Lakes Office Park is a 1.25 million-square-foot office park consisting of nine buildings ranging in size from 75,000 to 275,000 square feet.

The Minneapolis Airport Marriott is a five-story, 472-room, full-service hotel in Bloomington, MN. According to Fitch’s servicer notes, the property will likely require significant capital investment.

DHL Center is a 490,000-square-foot industrial building in Allentown, PA. The property was built for DHL which vacated in early 2009. DHL's lease expires at year-end 2025 with an early termination option at year-end 2020. DHL is paying an above-market rental rate. The property is currently 100% subleased by 3PL Co. The borrower and the special servicer have agreed to a foreclosure by January 2017.
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