December 22, 2015

BY ANDREW LITTLE Special correspondent | Posted: Sunday, December 20, 2015 10:30 pm | Richmond Times-Dispatch

Investors seem to be crooning Willie Nelson’s “The Party’s Over” song lately.

Thinking that all good things must come to an end, many are hunkering down for a storm seemingly before the clouds have begun to darken.

The fact that the Federal Reserve raised the interest rates range by 0.25 percent for the first time in nine years should be interpreted as a positive sign that the economy is doing better, but market sentiment is decidedly negative.

Perhaps the greatest carnage is being experienced in the low grade or “junk” bond market, particularly in oil-related companies. The repercussions, however, are much more widespread.

As a result, bond investors in the commercial mortgage backed securities market are demanding prices on AAA bonds that haven’t been offered in more than three years, and conduit lenders have little ability to resist the widening.

In an interesting twist earlier in the month, several deal managers decided to pull offerings because pricing was not where they had hoped.

This rare push-back seems to offer some hope that at least some market participants think the price widening is temporary.
UBS, Morgan Stanley and Bank of America muddled through their offering and were saddled with AAA pricing that had not been as wide since mid-2012, according to Commercial Mortgage Alert.

Pricing recovered slightly on the ensuing two deals, but there is distinct lack of buyer interest in the market.

When combined with the typical end-of-year lack of lending appetite from insurance companies, borrowers are scratching their heads over what to expect as the page turns on 2015 and they look at 2016.

From the perspective of many life insurance companies, mortgage investments are still attractive and allocations for 2016 should be higher than 2015, so that leg of the lending stool is solid.

Banks also are increasing their appetites and should play a strong role in the new year.

Fannie Mae and Freddie Mac also got a surprise boost recently when their overseer announced that each would have slightly higher allocations in 2016 than in 2015, a combined $62 billion limit versus the $60 billion limit currently in place.

The weak sister unfortunately is commercial mortgage backed securities lenders. The combination of new SEC regulations, more conservative first-loss investors and wide bond pricing is threatening to cripple the industry just as the so-called wall of maturities hits in the next two years.

Commercial mortgage backed securities volume peaked in 2006 and 2007 for 10-year loans and those loans are expected to come due in the next two years.

Commercial mortgage rates are down from last month for top rated mortgages, but up slightly for conduit quality loans, according to the John B. Levy & Co. Mortgage Survey.

Top quality 5- and 10-year loans now range from 3.3 to 3.8 percent, respectively. Full leverage 10-year conduit loans are pricing closer to 5 percent.
Several loans secured by Richmond assets are included in the wall of maturities hitting the market in 2016.

Probably the largest question mark surrounds the workout and pending loan modification for the loan on the James Center.

The 974,268-square-foot set of three buildings at the James Center complex in downtown Richmond is facing a $150 million loan maturity in January, according to Trepp LLC, a New York-based information firm for commercial real estate and banking industries.

The loan per square foot is roughly equivalent to the expected sales price per square foot of Riverfront Plaza, another Richmond office tower that is reportedly under contract to be sold.

The twin tower of Riverfront Plaza is currently controlled by Hines REIT, a public non-traded company affiliated with Hines Interests based in Houston.

The 950,475-square-foot buildings were purchased in 2006 for $277.5 million. Recent filings by the REIT indicate the value was impaired and the asset was written down by $27.9 million for the nine months ended Sept. 30, 2014, and $38.8 million in the nine months ended Sept. 30, 2015.

It would appear an additional write down will occur when the building trades.

In a Dickensian tale of two fortunes, these two iconic multi-tenant buildings are facing difficulty while newer single-tenant buildings are selling for eye-popping numbers.

The Gateway Plaza building sold this month as planned to Lexington Realty Trust, a New York-based real estate investment trust. It sold at more than $315 a square foot with additional payouts available to the developer related to leasing that could push the price up.

And the Williams Mullen building is reportedly under contract to be sold for $371 a square foot.

John B. Levy & Co. investment banker Andrew Little can be reached at