Moody's Alters its CPPI

CRE Console did a summary comparison here.

I'm not going to just copy and paste his entire post here, but this image kind of sums of the results very succinctly:

Turns out CRE has improved far greater than we thought... or is it just a really suspicious outcome?

Move along, everything is fine now - CPPI up 2.4% mom

Oct. 24 (Bloomberg) -- 

U.S. commercial property prices rose 2.4 percent in August, the fourth straight months of gains, according to Moody’s Investors Service. 

    The Moody’s/REAL Commercial Property Price Index is now 15 percent above its post-peak low in April, the company said in a statement today. Moody’s doesn’t see “significant” price gains in the near term as loan originations based on commercial- mortgage backed securities slow and demand for vacant space continues to “languish,” the company said.

Commercial Prices Drop 3.7% from March to April

From Bloomberg:

U.S. commercial property prices fell in April as sales of distressed assets made up a large share of transactions, according to Moody’s Investors Service. The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000

Comings and Goings

The Moody's Real CPPI dropped 2.6% in February - following three months of increases. It's off 41.8% from the peak.

Uniqlo (We'll have to ask my wife what type of retailer they are - ADR FRCOY) got a 1/3 off deal on their rent at 666 Fifth Avenue (several deals) for the street level retail at just $20mm per year (down from $30mm asking). It's being touted as a record breaking deal, but it's not clear which record is being broken - there certainly have been larger over all deal sizes, and the price per square foot doesn't seem like a record breaker... In fact, the square footage must be wrong. It's listed as 89,000 everywhere I look, but that's just $224 psf - there are plenty of leases at $2,000 psf for fifth avenue retail (Abercrombie & Fitch is in the same building at $2+k, although their space is dark). There is an extra zero somewhere in there. Actually, I don't think the floor has that much space available. Abercrombie is out, Brooks Bros. is out. Maybe it stretches up into the office space and actually helps out the CMBS loan (which does not include retail) - the $psf might actually make more sense that way too (assuming the 89k is correct). It could be - I see they have a 51k square foot space at 546 Broadway (JPMCC 2007-LDPX).

Bottoms Up?

Numerous sources have been hinting at a bottom in CMBS, including Barclays who said,

From a macro perspective, an uptick is a clear positive, as it suggests that the gap between buyer and seller preferences is narrowing and could signal that some believe a bottom in prices is approaching.

Housingwire noted that the CPPI is now down 44% on average, and 58% down for distressed properties - back to 2001/2002 levels. They also noted that the insurers bid will come back now that they can rate their own bonds - maybe for new issue, but not so much on legacy assets would be my guess.

They also note the coming risk of partial IO bonds, and this is a very real threat. Up until just last month, we were averaging about $2.5 billion in partial IO rolls each month, but that just spiked above $3 billion in January, and touches $4 billion by July. After a loan rolls from partial IO to amortizing, the average increase in debt service costs is around 20%, but lower coupon loans can get substantially above that, and amortization terms are all over the place. Although CMBS loans were ideally on stabilized properties, the worst offenders of proforma underwriting were loans structured as partial IOs - the lender would underwrite rents in year 5 to the necessary level, and to make it cashflow, would just not require amortization payments until month 61 (as an example).

As a more specific example, take a look at the largest loan to roll to amortizing payments this year, Grand Plaza, $86.5mm, in CD 2007-CD4. That property generated NOI of $6.4mm, and had debt service of $5.1mm last year - the new annual debt service will be approximately $1mm more at $6.1mm. The property cashflows at that level, but the debt service increased by 21.5%, and the property is already underwater at anything above 6% cap rates.

In all fairness, even last year, we had about $30 billion in partial IOs roll, which is about the same for this year, 2011, and 2012.



The biggest near-term concern is the expiration of TALF this month, but Citi made a very good point last week that repo lending has made its way back for most TALF-eligible bonds, and is competitive with TALF financing. They make a linear argument, but fail to explore why anyone would risk TALF if they could get a better deal in the repo market. TALF is clunky, and does not curry favor with either party like a nice repo line can.


Several folks have pointed to the 100 or so bps of tightening over the last 3 months, but in the grand scheme of things, the market has been pretty flat since last fall.

So, a bottom? maybe, but I think it's too early. We still have a lot of pain to work out in the pipeline, LNR still needs to file for bankruptcy, and we're only just starting to see a deluge of defaulted CMBS properties getting sold at viable prices. I don't think there is much to gain by holding a position through March just for the carry, but I also don't think we should all just sell all MBS like PIMCO has done.