Even as woes mount in the commercial real estate market, a once-vital source of funding for commercial property owners is showing signs of life. In the coming weeks, banks, including J.P. Morgan, Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., are expected to launch two offerings of commercial mortgage-backed securities, or CMBS, totaling $1.4 billion, according to people familiar with the matter. Representatives at the banks declined to comment.
J.P. Morgan is leading a $650-million offering backed by properties owned by real-estate investment trust Vornado Realty Trust, people with knowledge of the situation said. Vornado, of Paramus, N.J., will use the proceeds to repay existing debt, these people said. A spokeswoman for the company declined to comment.
Goldman and Citigroup are leading a $750-million CMBS issue that includes a $100-million loan Citigroup is making to Flagship Partners LLC. The landlord is using the loan to refinance debt on the portion of 660 Madison Ave. in Manhattan that houses the Barneys New York retail department store.
These transactions, along with four CMBS issues sold earlier this year, represent further evidence that some big banks are coming off the sidelines, partly because property values have started to stabilize after plunging more than 40% from the peak in August 2007. But the CMBS market is coming back only in drips, enabling the strongest owners to get stronger by taking advantage of distressed prices.
Few expect a rush of new CMBS deals in the near term as the real estate industry braces for more than $1 trillion of maturing debt over the next five years. While the handful of fresh issues has begun to revive one of the most important funding sources for commercial real estate in the past decade, it will likely provide little solace to owners of hundreds of billions of dollars of office buildings, strip malls and other commercial property now worth less than their mortgages.
“It won’t help the borrowers who are deeply underwater,” said Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house.
The rise in delinquencies on existing CMBS loans also is worrying issuers and investors. Today, more than 8% of $578.6 billion of loans packaged into CMBS are at least 60 days past due. Credit rater Standard & Poor’s expects that rate to reach as high as 11.5% by year’s end.
*As reported in the Wall Street Journal