Q2 2011 CRE Loan Quality Report

    In the most active US commercial real estate investment markets, including New York City, Washington, DC, and San Francisco, measures of quality for newly originated mortgages declined between Q1’11 and Q2’11. The deterioration in debt yield (DY) at origination, a predictor of default probability and loss severity, was most evident for loans secured by performing office properties in major markets’ central business districts (CBD) and for high-rise apartment building loans.

    Excerpt from the Q2 2011 Loan Quality Report

    Across all markets, industrial DY has fallen slightly over the last six quarters, converging on retail DY levels in Q2’11. Apartment and office DY has fallen more precipitously, however, as lending has responded to improving property values while property NOI has improved at a slower pace. In effect, apartment and office borrowers are encumbered with more debt for every dollar of cash flow their properties produce, heightening downside risks should cash flow decline.

    Given a sharp tightening of lending standards during the financial crisis and recession, it is reasonable to posit that current declines in DY simply reflect a normalization of underwriting terms. The larger volume of loans, an increase in the number of active lenders, and the direction of results in the Federal Reserve's latest Senior Loan Officer Opinion Survey on Bank Lending Practices are consistent with this hypothesis.

    Drawing on long-term measures of composite debt yield for securitized loans across property types, which have only approached 10 percent on one occasion during the period of analysis referenced in a report by DBRS, current office and apartment lending trends in major markets warrant some concern.

    Read the Bloomberg News and BusinessWeek coverage of the Q2 2011 findings: Apartment Loan Quality Worsens as Price Gains Outpace Growth in Rents, by Hui-yong Yu.

    Read the GlobeSt summary of the Q2 2011 findings: Mortgage Loan Metrics Decline, by Carl Gaines.

    LOAN QUALITY AND CREDIT ANALYTICS

    How is the credit cycle driving investment outcomes? and longer-term risks on lenders' balance sheets and in securitization markets?

    Each quarter, the Loan Quality Report empowers investors, lenders, and policymakers with a critical assessment of changes in commercial real estate credit risk-taking, across markets and lender groups.

    Learn more about our Debt & Credit Analytics service or call us to speak with a member of our research team.