Chicago Loan Delinquency Rate Lowest Since 2010
Special servicers — firms that get paid to work out bad real estate debt — have a lot more free time these days.
The delinquency rate on Chicago-area commercial mortgage-backed securities (CMBS) loans dipped below 5 percent in May and has stayed there, its lowest point since January 2010, according to Trepp LLC, a New York-based research firm.
The rate was 4.9 percent in July, down from 7 percent a year earlier and a peak of 10.6 percent in January 2013.
With the expanding economy boosting rents and occupancies, fewer landlords are being forced into talks with CMBS special servicers, the real estate equivalent of being sent to the woodshed. Rebounding real estate values and the robust lending climate also have helped property owners score new loans to pay off maturing ones, something many struggled to do after the crash. And a lot of the mess created by the boom and bust already has been cleaned up.
“A lot of the problem loans have been worked out, sold, foreclosed, whatever,” said mortgage broker Jeffrey Bucaro, senior vice president at Chicago-based Aries Capital LLC.
Properties that have emerged from loan trouble in recent months include the Glen Town Center, a 267,000-square-foot retail property in Glenview that was sold in May, about eight months after being repossessed by its lender, and two industrial buildings in Niles and Morton Grove. The owner of the industrial properties, Santa Monica, California-based Colony Capital LLC, recently persuaded a special servicer to push back the maturity date on about $54 million in debt on them.
123 N. WACKER, JAMES HOTEL
Yet about $791 million in Chicago-area CMBS debt is still delinquent. That includes about $121 million in debt on the office tower at 123 N. Wacker Drive and $82 million on the James Hotel in River North. Both properties carry loan balances that exceed their recent appraised values.
Trepp classifies a loan as delinquent if a borrower is more than 30 days late on a mortgage payment, or if the loan is foreclosed. The Trepp data covers commercial real estate loans that banks package and resell as bonds. The delinquency rate on commercial property loans held by banks also has declined.
“Delinquencies will continue to drop and become less and less of an issue,” said mortgage broker David Hendrickson, a managing director at Chicago-based Jones Lang LaSalle Inc.
Some observers are concerned that bad debt will start piling up again next year, when CMBS loans start coming due that were made 10 years ago, as the market was starting to overheat. Even though lending has picked up, the worry is that some landlords won’t be able to borrow as much as they could back then, when property values were inflated and lenders lost their restraint. But Mr. Hendrickson isn’t concerned.
‘LOOKS PRETTY GOOD’
“You could have some problem loans that come up, but right now it looks pretty good,” he said.
The other question hanging over the market is whether CMBS lenders will lose their discipline like they did in the last boom, setting up the market for another crash. CMBS lenders face tougher competition from banks and insurance companies, creating incentives to loosen their lending standards.
More lenders are offering better terms like interest-only loans, making it easier for borrowers to qualify for financing. But they are still tough when it comes to evaluating the creditworthiness of properties and their owners, Mr. Bucaro said. For instance, most will approve a loan based only on existing income, not projected income, a practice that got them in trouble the last time around.
“Projections are nothing. They are questioning everything,” Mr. Bucaro said. “The underwriting is still solid. The metrics are loosening.”
Source: Chicago Real Estate Daily August 11th 2014 Alby Gallun