Nearly $11 billion dollars went down the drain during the heyday of the mid-2000s real estate boom as prospecting developers delved into an easy flow of cash to finance projects that were based more on bright ideas than basic fundamentals.
A total of 3,196 commercial mortgage-backed securities (CMBS) conduit loans totaling nearly $24.6 billion have resolved with losses since January 2010, according to the latest data from Trepp’s November Loss Analysis report.
The liquidations – from loans made in 1996 through 2008 – resulted in nearly $10.7 billion in losses, with an average loss severity of 43.48 percent.
Peaks occurred in 2005, 2006 and 2007, accounting for 1,640 of the liquidations and roughly $7 billion of the losses, suggesting riskier behavior and more aggressive underwriting during those years.
“Projects were being put together based on the ability to raise financing as opposed to based on real estate fundamentals – good properties, good rents, strategic planning,” said Tom Fink, senior vice president and managing director at Trepp.
“They were underwritten based on the borrower executing a business strategy to increase the revenue from the properties in question. A lot of those strategies didn’t bear out.”
Excluding loss severities less than two percent, 2,644 total loans totaling more than $19.3 billion resulted in losses that still exceed $10.6 billion, boosting the average loss severity to 55.02 percent.
It’s a more telling number and a higher one than most expected, focused on “true situations where properties are liquidated for significant losses,” Fink said.
“This may tell people they should ratchet up their loss severity a little bit in terms of calculating projections and payment timings and things like that on bonds,” he said, adding that most industry professionals were expecting loss severities somewhere in the mid 40’s.
Retail properties had the greatest number of liquidations (greater than 2 percent), with 877 loans accounting for roughly $3.3 billion in losses and a loss severity of 57.66 percent.
Next in line were multi-family properties, with 669 liquidations, more than $2.5 billion in losses and a loss severity of 55.04 percent. Office properties had 143 fewer loan liquidations than multi-family, but had roughly $42,500 more in losses.
In terms of service providers, LNR Partners, Inc. topped the list with 1,217 liquidations, a loss of more than $4.4 billion and a severity of 41.2 percent.
Midland had the least number of liquidations — with 187 and roughly $760 million in losses — but the highest loss severity, at 53.26 percent.