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Commercial Real Estate Loans, Jamcrackers, Pike Poles And Dynamite

 January 05, 2009 10:17 AM

Many commercial real estate loans are heading inexorably toward their 2009 maturities, and straight into a titanic log jam in the capital markets. In the old days of commercial logging, this uncertain situation called for a Jamcracker. The job was extremely dangerous and required the Jamcracker to walk over the log jam and break it up with pike poles or, as a last resort, dynamite.

The commercial real estate loan Jamcrackers of 2009 face an equally dangerous mess, but the real day of reckoning is being extended to 2010. Many 2009 loan maturities will likely be extended into 2010. These extensions will make 2010 an even more pivotal year for commercial real estate values, and the Jamcrackers will be jumping by then, not walking.

Because liquidity is now almost non-existent, master CMBS servicers are reporting transfers of more loans with upcoming maturities to special servicing even if they're performing. Special servicers have the flexibility to work out, modify or extend loans up to a year at a time, whereas a master servicer can only offer a short term extension.

Fitch identified approximately 1,100 of these individual fixed-rate CMBS loans that need to refinance on or before June 30, 2009. The loans total $5.7 billion in value, and they will more than likely be transferred to special servicing due to the continued lack of available capital to refinance. This is on top of 100 floating rate CMBS loans, totaling $12.7 billion that will likely also be extended, and 22 floating rate CMBS loans totaling $1.3 billion that will reach their final extended maturities in 2009. For those latter loans, 2009 is the end of the road. In total, the Real Estate Roundtable estimates that there is $400 billion in commercial real estate loans that need to be refinanced in 2009.

Many of the fixed rate loans would have refinanced a year or even six months ago because they've been amortizing and have attractive debt service coverage ratios, but even these loans are caught in the liquidity logjam. Lenders, trustees, banks and special servicers are faced with choice of having to extend these loans and delay full repayment until liquidity returns, or foreclose on properties in a market that is completely stalled.

The problem is that there seems to be no end to the stalled market, and 2010 looks no better than 2009. Defaults doubled in 2008, albeit from historical lows, and Fitch is predicting that CMBS delinquencies could hit 2 percent by the end of 2009. Office vacancy rates are now reaching into double digits even in "superstar" cities such as New York, Chicago and Los Angeles, and they may reach 20% by year-end. Retail centers and hotels are doing no better.

As the souring economy catches up with tenants and landlords, problem loans are growing at an even more more rapid clip. For the first three quarters of 2008, increases in CMBS delinquencies were almost negligible. However, CMBS delinquencies ticked up by 6 basis points in October, and then by 13 basis points in November. This was the biggest one-month jump of the year. It took all of January through June for CMBS delinquencies to increase just 14 basis points.

For the Jamcrackers of 2009 and 2010, the below data from Real Capital Analytics illustrates the dynamite dilemma. Capital needs to be recycled to get the river flowing again, but with buyers almost completely on strike, collateral recoveries through liquidations are likely to be lilliputian.

This is an unwelcome prospect for the capital-drained banks, pension funds, insurance companies and hedge funds holding these loans and planning on contractual return of capital in 2009. Unfortunately, these institutions cannot hold out forever without some sort of repayment.

If the Treasury finally follows through on the Troubled Asset Recovery component of its so-called Troubled Asset Recovery Plan, don't look for fireworks right away. Instead, expect a lot of Pike Poles to be gingerly wielded by the Treasury's Jamcracker proxies, Blackstone and Pimco, coached by lobbyists at the Real Estate Roundtable, who are extremely busy in Washington right now. But how long this can all go on before the entire river chokes to death is anyone's guess.


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