Debt investors are wagering that the worst is over for commercial real estate, driving prices on mortgage bonds to the highest in more than two years.
“Investors have gotten more comfortable and have started putting money back into CMBS,” Chris Callahan, head of commercial-mortgage backed bond trading at Credit Suisse Group AG, said in an interview at the Commercial Real Estate Finance Council’s conference in Washington. “It has gone from being the red-headed stepchild to being a viable asset class again.”
Investors are buying bonds tied to hotel, shopping center and skyscraper loans as more financing becomes available to borrowers, helping halt a slide in real-estate values. U.S. commercial property prices, which have declined 42 percent from their peak in 2007, rose for the third consecutive month in November, Moody’s Investors Service said in a statement yesterday.
So-called junior AAA commercial-mortgage backed securities, which are less insulated from losses than senior and mezzanine AAA classes, have increased almost 21 percent to 87 cents on the dollar during the past three months, according to data compiled by JPMorgan Chase & Co. The bonds, valued at about 51 cents six months ago, are at the highest levels since June 2008, JPMorgan data show.
Some of the bonds have doubled in price after investors overestimated potential losses in the aftermath of the 2008 financial crisis, said Kent Born, a senior managing director at Chicago-based investment manager PPM America Inc., which bought the debt that year.
“Our analysis at the time indicated that the underlying collateral wouldn’t perform nearly as badly as the deeply discounted price implied,” said Born, also speaking at the Washington-based conference. “That bet has definitely paid off.”
Sales of commercial-mortgage backed securities are poised to climb to $45 billion this year, according to JPMorgan, after banks arranged $11.5 billion of the debt in 2010. Rising sales make it easier for property owners with maturing loans to refinance. Issuance plunged to $3.4 billion in 2009 compared with a record $234 billion in 2007, according to data compiled by Bloomberg.
Property financing is flowing again, easing investor worst- case scenario concern, said Brian Lancaster, an analyst at Royal Bank of Scotland Plc. About $7 billion in new commercial- mortgage bond deals are in the pipeline for the next two months, he said during an interview in Washington.
$7 Billion Pipeline
“How that $7 billion is absorbed and how the bonds trade will be an important milestone for the market,” he said.
While late payments on commercial mortgages bundled and sold as bonds increased to 8.79 percent in December from 4.9 percent a year earlier, the pace of rising delinquencies is slowing, according to Moody’s.
The delinquency rate will probably keep rising in 2011, but at a slower pace than it has over the last two years, the New York-based rating company said in a Jan. 12 report.
More than 97 percent of junior-AAA commercial-mortgage bonds, or $37.6 billion, have lost their top rankings, JPMorgan data show.
Investors searching for higher yields have continued to drive up prices in the category, Lancaster said.
“You can find value, but you really have to do your homework,” he said.
Prices on securities issued in 2005 and 2006 may increase further, according to Alan Todd, an analyst at JPMorgan. Debt sold in 2007 when sales peaked and underwriting standards fell are less likely to gain, he said.
“A lot of it will be money good, but we are at a point where some of those bonds could still take a principal hit,” Todd said. “It’s going to be an uneven recovery.”