Intro
On July 29, Deutsche Bank issued a report on the state of Commercial Mortgage Backed Securities (CMBS's)- and their impact on banks. This analyst, Richard Parkus, appears to be one of their best, in contrast to the crew that issued housing market projections a few months back.
Background
CMBS are basically commercial real estate loans (or pools of them) packaged as securities and sold on Wall Street. From 2004 on until the bubble burst, this market grew enormously. Many of the highest profile acquisitions of recent years were financed this way, such as Stuyvesant Town. Many of these were acquired at such high prices relative to cash flow (low debt coverage ratios) that after the mortgage payments, cash flow was negative. As a result, many were structured with reserve funds, designed to carry debt service until the property's income picked up. That was the case with Stuy Town, where the buyers were hoping to turn a lot of rent regulated units, and achieve marked increases in their monthly rent roll. Their tenant rollover and their achievable rents have both fallen behind schedule. Consequently their income hasnt grown enough and their reserve fund is nearly exhausted
Simply put: they overpaid. The price was justified by overly optimistic visions of mainly two things: a) how many rent stabilized tenants would move out (either naturally, by buy-outs or deaths) and b) the growth in market rents.
The same equation existed for office proeprties and some shopping centers that were not considered stabilized or underachieving: buyers pro-forma'ed rent growth and rollover.
And i would say that a huge share of these acquisitions were funded by CMBSs.
NOt every property was unsuccessful. There is a huge (well over 1000 units) apartment complex in the Bronx that was acquired around the same time as Stuy Town. I know nothing of their financing situation, but theyve been successful getting their rollover, and market rent at first went up as they projected, although have stalled now.
This is typical for many assets
On July 29, Deutsche Bank issued a report on the state of Commercial Mortgage Backed Securities (CMBS's)- and their impact on banks. This analyst, Richard Parkus, appears to be one of their best, in contrast to the crew that issued housing market projections a few months back.
Background
CMBS are basically commercial real estate loans (or pools of them) packaged as securities and sold on Wall Street. From 2004 on until the bubble burst, this market grew enormously. Many of the highest profile acquisitions of recent years were financed this way, such as Stuyvesant Town. Many of these were acquired at such high prices relative to cash flow (low debt coverage ratios) that after the mortgage payments, cash flow was negative. As a result, many were structured with reserve funds, designed to carry debt service until the property's income picked up. That was the case with Stuy Town, where the buyers were hoping to turn a lot of rent regulated units, and achieve marked increases in their monthly rent roll. Their tenant rollover and their achievable rents have both fallen behind schedule. Consequently their income hasnt grown enough and their reserve fund is nearly exhausted
Simply put: they overpaid. The price was justified by overly optimistic visions of mainly two things: a) how many rent stabilized tenants would move out (either naturally, by buy-outs or deaths) and b) the growth in market rents.
The same equation existed for office proeprties and some shopping centers that were not considered stabilized or underachieving: buyers pro-forma'ed rent growth and rollover.
And i would say that a huge share of these acquisitions were funded by CMBSs.
NOt every property was unsuccessful. There is a huge (well over 1000 units) apartment complex in the Bronx that was acquired around the same time as Stuy Town. I know nothing of their financing situation, but theyve been successful getting their rollover, and market rent at first went up as they projected, although have stalled now.
This is typical for many assets
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