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CMBS Losses in 3Q Beyond Historical WA Loss Severity (CRE Bubbles??)

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

This story from Bloomberg reminds me of the Don Ho song “Tiny Bubbles.” But it may be more like BIG bubbles … in commercial real estate.

(Bloomberg) — U.S. CMBS losses jumped “well beyond” the historical weighted average (WA) loss severity in 3Q16, Moody’s said in a press release.

WA loss severity increased to 52% for loans liquidated during the quarter from 41.3% in the prior quarter, and above historical WA of 42.9% for loans liquidated between Jan. 1, 2000 and Sept. 30, 2016.

“Two notable large loan liquidations contributed to this increase — HSBC Center, from the 2005 vintage, which liquidated with a loss of $79.7m for a loss severity of 108.7% and Chapel Hill Mall, from 2006, which liquidated with a loss of $65.2m for a loss severity of 100.0%,” Keith Banhazl, Moody’s associate managing director, said 

*Loan liquidations from 2004 and 2005 vintages with loss severities above 50% were major driver of high loss severity, Banhazl says; vintages accounted for 32.9% of loans that were liquidated by balance and for 34.2% by number, and had WA loss severity of 70.4%

190 loans liquidated overall in 3Q with average disposed balance of $10.2m and a loss severity of 52.0% 3Q versus 229 loans liquidated with average disposed balance of $10.9m and a loss severity of 41.3% in 2Q

Cumulative WA loss severity for all loans liquidated increased slightly to 42.9% in 2016’s 3Q; 2008 vintage continued to have highest cumulative loss severity at 58.6%

Among the five major property types, loans backed by retail properties had highest WA loss severity in 3Q, at 48.9%

The good news for the retail sector is that commercial retail values are comparable to residential (single-family) prices. But office CBD and apartment prices seem very bubbly. Of course, The Fed’s zero interest rate and QE policies have helped inflate bubbles, particularly in the office and apartment sectors.


Sing along with Don Ho, Fed Chair Janet Yellen and Fed Vice Chair Stanley Fischer: BIG bubbles in the commercial real estate market.


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