Headlines – Week of November 6, 2011
November 11, 2011
CMBS Delinquencies Hit Could Go Higher
According to Trepp LLC, the CMBS delinquency rate moved significantly higher in October.
The delinquency rate for U.S. commercial real estate loans in CMBS moved up 21 basis points to 9.77%. The CMBS delinquency rate is now at its second highest level ever. Only the 9.88% reading in July 2011 was higher according to the report.
After experiencing a big dip in the delinquency rate in August, the rate has now increased for two straight months.
Morningstar’s structured credit research and ratings subsidiary RealPoint, also reported that there are future delinquency concerns on the horizon.
Morningstar reported that there are a number of loans on CMBS servicers watch lists that have never met pro-forma underwritten expectations or loans that have experienced significant performance declines. This includes a large number of loans on the master servicer watch lists that remain current in payment but which may ultimately default based upon a denial of requests for loan modifications or debt restructuring or a decision by borrowers to surrender the collateral.
By property type, the greatest future risk exposure by unpaid balance is found in office collateral, while retail collateral is by far the largest by loan count, Morningstar reported.
RevPAR Growth Expected to Continue Despite Economic Uncertainty
According to PwC US as reported in their updated lodging forecast, the momentum of the recovery in the lodging sector is expected to continue in 2012, despite the overhang of uncertainty. The improved outlook is in part due to the recent strength of business travel, which, despite greater uncertainty in the economic outlook, and resultant business and consumer confidence, has recovered strongly.
Lodging demand during the third quarter exceeded the previous peak achieved in the first quarter of 2006 by 3.1 percent, on a seasonally adjusted basis. This recent strength in demand recovery is expected to continue to drive revenue per available room (RevPAR) growth in 2011 and 2012. The PwC forecast now expects RevPAR growth of 7.8 percent and 6.5 percent in 2011 and 2012, respectively.
PwC’s updated quarterly lodging forecast reflects a revised macroeconomic forecast from Macroeconomic Advisers, LLC, which now expects improving economic growth during the remainder of 2011 and in 2012. Macroeconomic Advisers revised upward its forecast for real gross domestic product (GDP) growth in the second half of 2011 for the first time in eight months. As a result of this revision, its outlook now anticipates real GDP to grow 1.6 percent in 2011, with gradual acceleration in the second half of 2012, reaching a 3.0 percent rate in the fourth quarter of 2012.
Lodging demand in 2011 is now expected to increase 4.8 percent, which combined with restrained supply growth of 0.7 percent, is expected to boost occupancy levels to 59.9 percent, the highest since 2007. Average daily rate (ADR) is expected to increase by 3.6 percent in 2011. In 2012, as the economic growth firms up, ADR growth is expected to accelerate to 5.2 percent, driving a RevPAR increase of 6.5 percent.
Pace of Bank Failures Picks Up Again
According to another Trepp LLC report, eleven banks failed in October, up sharply from six in September and seven in August. The count through October is now 85 failures year-to-date, putting the annualized pace just over 100 for the full year 2011.
The pace of closures in October was above the year-to-date average of 8.5 per month.
Commercial real estate exposure was the main driver behind problem loans for the banks that failed in October. Commercial real estate (CRE) loans comprised $401 million (65.1%) of the total $617 million in nonperforming loans at the failed banks.
Construction and land loans made up $254 million (41.2%) of the total, while commercial mortgages comprised $147 million (23.9%) of the total nonperforming pool.
The residential real estate loan category was a secondary source of distress, with $136 million in nonperforming loans, or 22.0% of the total nonperforming balance.
The failures mainly occurred in the Southeast and Midwest.
In the Southeast, there were three failures in Georgia and one each in Florida and North Carolina. Georgia and Florida rank first and second for failures, both in 2011 year-to-date and in the current cycle of failures that started in late 2007.
In the Midwest, there were two failures in Illinois and one each in Missouri and Minnesota. Illinois ranks third in the nation for failures, both in 2011 and in the current cycle. Minnesota ranks fifth (tied with Washington) for failures in the current cycle, but the pace of failures has dropped, with only two failures in 2011.
One failure occurred in the Northeast-First State Bank in New Jersey. Failures have been less prevalent in the Northeast, as the region avoided the worst excesses of the housing boom.
The largest failure occurred in the West-Community Banks of Colorado. It accounted for nearly 40% of total failed bank assets in October.
In addition, two more banks failed in the first week of November: SunFirst Bank in St. George, UT and Mid City Bank Inc. in Omaha, NE.
Posted by Scott R. Lodde