NEW YORK, NY - An accelerated downturn in commercial real estate next year may spark a wave of borrowers pushing for easier terms on loans that are otherwise heading into default, according to JPMorgan Chase. Commercial property loans originated in 2005 to 2007 that increasingly carried risky terms are likely to see a significant increase in defaults in 2009 due to lack of credit, falling property values and reduced cash flow, said Alan Todd, head of commercial mortgage bond research at JPMorgan, in published research.
He said the slowing economy that is wreaking havoc on cash flow expectations may also present mortgage companies with a dilemma as borrowers confront them with the choice of either easing loan terms to preserve value, or default. The number of loans transferred to companies that specialize in troubled mortgages has already risen significantly and will climb into 2010, Todd said. "Moral hazard may become an issue as borrowers begin to claim 'dire straits' with the hope of having their loan terms modified by the special servicer," he said.
General Growth Properties Inc GGP.N, the No. 2 U.S. shopping mall owner, said on Sunday it received a two-week extension on the maturity of $900 million in Las Vegas loans as it tries to negotiate a longer-term plan. Results of the negotiations are closely watched in the $750 billion commercial mortgage-backed securities market, which has been battered on expectations a recession could boost bondholder losses.
The imminent default of two of the largest loans in CMBS less than a year old, including one for the Promenade Shops at Dos Lagos in a foreclosure-ridden area of California, this month helped propel bond risk premiums to record levels. Todd said he was most concerned about retail properties since a recession and a "severely weakened consumer" with limited access to credit will continue to curb retail sales. Investors sold shares of retailers on Monday on expectations an initial holiday-season spending surge would not last.
Delinquencies on loans in CMBS remain low relative to residential mortgage debt, but are rising at fast rates. In retail, delinquencies increased to 0.4 percent in October from a low of 0.08 percent in July 2007, more than twice the rise in the multifamily sector and 151 percent of the jump for office properties, he said.
The most important factor for CMBS value in 2009 will be the availability of credit, which will prevent many loans with aggressive terms such as high loan-to-value ratios from being refinanced, Todd said. "Many of these loans will become a nightmare as a severely slowing economy, significantly tighter credit requirements and falling commercial real estate property prices force many borrowers to default over the coming years, or to infuse equity at the refinance date," he said. Commercial property prices may fall as much as 40 percent from peak-to-trough, Todd said. Prices are down 11.5 percent from October 2007, he said, citing Moody's Investors Service.
Given the outlook, special servicers may adopt an "extend everything" policy since liquidating assets in a distressed and illiquid market may cause deeper losses, Todd said. "It has become increasingly obvious that commercial real estate credit problems will finally materialize and intensify in 2009," he said.
Source: AllHeadlineNews.com