All three are among the local properties that have large commercial mortgages coming due in the next two years. Between now and the end of 2010, there are 27 CMBS loans coming due in the Richmond metropolitan area with $178.2 million owed when they mature, according to commercial real estate tracking firm Trepp.
These borrowers face the prospect of either trying to refinance in a tight credit environment or selling at a time when property values are declining. And because these loans have been bundled into securities and sold on the secondary market, investors are worried many of them could default. That could dump even more property on a stagnating commercial real estate market.
The local properties represent a mere sliver of the $700 billion worth of loans secured by commercial mortgage backed securities (CMBS) that are currently financing real estate investments across the country. Banks are no longer making CMBS loans because the secondary market for them has dried up, which means borrowers will have to find another way to hold on to their investment, lest they face foreclosure.
John B. Levy, founder of the real estate banking firm that shares his name, said those borrowers might be in for some major hurdles when their loans mature.
“For some of these people, it will be somewhat ugly because they will have to come up with more equity and maybe pay a higher interest rate,” Levy said. He said some borrowers might have to come up with as much 20 to 30 percent of additional equity.
But many of the borrowers might not be able to refinance at all. According to the Wall Street Journal, the Deutsche Bank estimates that $154.5 billion worth of securitized commercial mortgages will come due in the United States between now and 2012. In Richmond, $526 million will come due during the same period. The Deutsche Bank predicts that two-thirds of CMBS loans are held by borrowers who won’t be able to qualify for refinancing because of the restricted flow of credit.
If the same holds true for Richmond, that leaves $350 million worth of loans that borrowers will be scrambling to pay off. The possibility of default is growing because retail and office vacancies are cutting back the amount of rent landlords collect. Property owners experiencing high vacancy rates and declining revenue might find themselves up against a brick wall when it comes to securing credit.
“If you take credit away from real estate long enough, you will create delinquencies,” Levy said.
Although commercial mortgage delinquencies aren’t a problem here yet, they are quietly creeping up. Among Richmond’s 351 CMBS loans (valued at $2.5 billion), seven of them are delinquent, for a default rate of almost 2 percent. That is just above the national default rate of 1.8 percent reported by Deutsche Bank.
Default rates peaked at a similar level during the recession in 2001. But Levy and others in the industry expect them to keep climbing.
“We’re not through this yet,” Levy said.
The national default rate is rising at a rapid pace. According to Fitch Ratings, the U.S. default rate on CMBS loans reached 1.28 percent in February, about double the rate reported in November. Fitch expects the rate to reach a minimum of 3 percent by the end of 2009. By comparison, it took from January to June of last year for the CMBS default rate to increase less than a quarter of a percent.
The seven delinquent loans in Richmond total $61.6 million, the most notable of which is the foreclosure of a 1200-unit garden style apartment complex called the Communities at Southwood near Hull Street and Warwick Road. The property is now owned by Wells Fargo after the investors defaulted on a $50 million loan.
“I think that was a story of gross over-financing when it was done,” said Levy. “They put up a ton of money, and the market is not supportive of those rents.”
As far as the 27 loans coming due through the end of 2010, it is too early to tell how many, if any, will default. But the borrowers will face a different credit environment than they did when the loans were originated.
John Gentry, a commercial broker with Grubbs & Ellis | Harrison & Bates, said at the last peak of the real estate market when property values were still rising banks were eager to issue CMBS loans.
“They figured these buildings would have gone up so much in value there would be people in line to buy them, or the people that borrowed would be perfectly willing to ante up for another five years,” Gentry said.
CMBS loans were typically issued for five-, seven- and 10-year periods with a large balloon payment due at the end of the term. Gentry said underwriting was so loose that lenders were often not even considering vacancy factors when issuing a loan. Now owners with a building that is only 70 to 80 percent occupied could run into trouble getting a new loan, said Gentry.
“The underwriting is far more rigorous than you faced when you originated the loan five years ago,” Gentry said. “Unless your property is performing or you have a substantial amount of cash to re-plow into it, you can see that refinancing can be difficult and expensive.”
Gentry said the holders of these maturing loans have three basic options: go to a commercial bank that is still lending and hope to qualify; sell it – that is, if they can find a buyer; or give it back to the bank, in which case they lose everything and possibly face taxes on the forgiven debt.
A representative of Trepp, which provided BizSense data on CMBS loans in the area, said none of the 27 properties appeared to be in immediate danger of default.
One that may face a problem is one of the former Circuit City headquarters buildings, owned by Lexington Realty Trust. The 288,000-square-foot building very quickly went from being 100 percent occupied before the electronics retail began its descent into bankruptcy to being completely deserted. Sources have confirmed that Lexington is looking for a brokerage to sell or lease the building.
The loan on that building is due during the first quarter of next year, and the debt remaining is $15.45 million. The company will be hard-pressed to find a tenant to replace the $2.8 million in yearly rent that left with the departure of Circuit City.
One property coming due this year is the 96,000-square-foot office building at 1970 E. Parham Rd. in Henrico. It currently houses the Richmond FBI office and is owned by an Australian-based real estate investment trust called Rubicon America Trust. Rubicon announced this year that it was liquidating the REIT. The Parham Road property was part of a portfolio of four properties being considered for purchase by Kaufman & Jacobs, for $26 million less than the portfolio was valued at in June.
Of the 27 properties in Richmond with CMBS loans coming due, 12 are retail, seven are office, seven are multi-family and one is a parking deck. Below is a list of the five largest CMBS loans coming due in the next two years:
Riverside on the James
1001 Haxall Pointe, Richmond City
Type: Office (Note: Residential and retail portions were financed separately.)
Size: 252,300 square feet
Current balance: $53 million
Downtown Short Pump
11600 W. Broad St., Henrico County
Type: Retail shopping center (includes Regal Cinemas and TGI Friday’s)
Size: 126,000 square feet
Current balance: $18.48 million
Richmond FBI Headquarters (tenant, not owner)
1970 E. Parham Rd., Henrico County
Size: 96,600 square feet
Current balance: $17.15 million
Circuit City Corporate Headquarters (Deep Run One)
9950 Maryland Dr., Henrico County
Size: 288,500 square feet
Current balance: $15.45 million
Addison’s King Crossing V
10002 Castile Court, Henrico County
Type: Multi-family residential
Size: 168 units
Current balance: $13.8 million
Al Harris covers commercial real estate for BizSense. Please send story tips to [email protected]