Boston has been spared the nightmare of a flood of non-performing commercial mortgage backed securities (CMBS) loans afflicting other markets nationwide, according to several industry experts.
The Hub ranked lowest for the amount of distressed CMBS loans in a survey of 15 major U.S. cities and Ontario, Canada. Boston’s numbers are well below those of Seattle, Phoenix, Philadelphia and Atlanta, according to statistics from the Boston office of Colliers International.
In the last two years, underpriced and over-leveraged securitized debt matured in many regions, while capital became scarce and real estate values plunged. But thanks to strong industry fundamentals and a Massachusetts economy that has weathered the storm better than other states, the local market largely avoided the wave, analysts told Banker & Tradesman.
Pent Up Capital
Those fundamentals include a local tendency toward conservatism in loan underwriting and not over-building to create a surplus of properties, said Lisa Campoli, who deals with capital markets as an executive vice president at Colliers.
“In Boston the CMBS loans tended to be for smaller assets, so there’s a more diverse loan pool,” Campoli said. “In general, investors and owners tend to be more conservative here than in other places. I think it’s also a testament to the health of the region.”
The conventional wisdom over the past 18 months has said there will be a tidal wave of CMBS loans expiring in 2011, and again in 2016, and that there’s not going to be anyone to refinance the debt. Not so, according to Campoli.
“In fact, there’s plenty of capital that will meet the refinancing needs of this maturing debt,” she added. “There will be some value loss, but it’s not going to become the crisis that people anticipated. There’s been a pent-up demand among lenders to put money out, and they’re still appropriately conservative in their underwriting.”
The relative lack of Boston-based CMBS delinquencies hitting the market did not stop Hub firms from purchasing matured debt from other regions. Local real estate investment and development firm The Davis Cos. recently created an investment fund to take advantage of a variety of distressed real estate debt and equity investments.
Among other things, they purchased approximately $50 million worth of CMBS bonds in the last two years or so, much of which the company sold after the recent, modest, market recovery. Between July 2009 and the end of 2010, the firm realized a more than 60 percent return on the positions they sold, said CEO Jonathan Davis. The company also purchased another half dozen loans nationwide.
Davis acknowledged he had a hard time purchasing distressed loans in Boston, although he has acquired assets. The company bought two buildings totaling 260,000 square feet at 1 and 3 Burlington Woods from a GE Capital portfolio at a recent foreclosure action, and the debt on two failed Boston condominium projects – Audubon Park in the Fenway and a loft conversion in Dorchester.
Davis said he has found richer opportunities in places like the Rocky Mountain states, metropolitan Chicago, and the Southeast, where he says the distress has been greater and there is less capital available from both investors and lenders. But even in those locations, he said it is getting harder to buy.
“The buyers have generally concluded that the severity of losses in commercial real estate is not going to be as great as anticipated,” Davis continued. “We’ve probably seen the bottom in terms of values. There’s not as much pressure on the holders of the debt to liquidate it, and there’s not as much panic on the part of the sellers. There’s more capital coming into the market now.”
Deceiving Appearances
Thomas Alperin, president of Newton-based National Development, said that while many loans may appear delinquent, he believes a substantial amount of those will be restructured by the existing borrower.
His own company intentionally skipped an interest payment on its 200 Crossing Blvd. property in Framingham, in order to trigger a dialogue with the special servicer. National later ended up repaying the loan – in full – earlier than originally planned. Alperin said the company skipped that payment because until the loan is in default, the servicing agent on the deal does not have the ability to restructure the loan.
“I don’t think we’re going to see a lot of loans trading, particularly loans of any reasonable size or institutional quality,” Alperin said. “I don’t think there’s going to be any rush to market. It will work itself through the market.”
Charles River Realty recently purchased a loan from Hypo Bank secured by the Beach Street Garage in Boston, but Brian Kavoogian, president of Charles River Realty Investors, declined to offer details of the transaction.
“It’s one of the few that have actually been sold in the entire market,” he offered.
Kavoogian said commercial banks are under little pressure from regulators to resolve loans in which the collateral may be less than the loan balance and debt service payments are still being made. Since many of those loans are on a floating interest rate while rates are “pretty low,” Kavoogian asked, why would they?
“There is a fundamental optimism about the performance of quality real estate in Boston, and therefore you just don’t see capitulation on the part of lenders or current property owners,” Kavoogian said. “It’s happening in the Southeast and Southwest, where the economies have been much more impacted than ours, and they don’t have nearly the limits on supply as we have … here in Boston.”
Michael Smith, managing director for brokerage Jones Lang LaSalle in Boston, said that Boston continues to be a market highly favored by investors, fueling a willingness of special servicers and banks not to cleanse themselves of non-performing loans.
However, he warned against underestimating the CMBS loans maturing in 2015 and 2016.
Those, he said, “are going to need to be dealt with.”
