October 15, 2017

Andy Little


by Andrew Little, Special Correspondent

After taking a short breather earlier in the year, commercial real estate markets are singing the “Movin’ On Up” theme song from the hit ’70s television show “The Jeffersons.”

Leading the resurgence is a stable and healthy conduit market that is producing loans at a pace not witnessed in three years.

Loans in the third quarter were originated by conduits and sold as commercial mortgage-backed securities at the fastest quarterly clip since 2014, according to data from real estate news publication Commercial Mortgage Alert.

On top of that, loans that are expected to be sold as commercial mortgage-backed securities this month will push year-to-date loan contributions above all of 2016.

Data show that virtually all of the larger loan originators experienced huge loan growth in 2017. Looking at the top 10 commercial mortgage-backed securities originators through the first nine months of 2016, all but two increased output for the first nine months of 2017. Of those originators, the average increase was 61.27 percent in 2017, compared with 2016.

The two that underperformed were UBS with a 7 percent decline from last year and CCRE, which practically fell off the edge of the commercial real estate world with a whopping 84.5 percent reduction in loan contributions to commercial mortgage-backed securities.

One particular deal stands out as an interesting example of the rising tide. In September, JP Morgan, Citibank and Goldman teamed up to sell $1 billion in commercial mortgage-backed securities senior bonds whose collateral is 12 Great Wolf Lodge hotels, including the resort property located near Williamsburg. Additional collateral included two joint venture interests and the value of a management agreement on a non-owned asset. The senior debt was combined with an additional $500 million of subordinate debt for a total loan value of $1.5 billion.

According to a Kroll Bond Rating Agency pre-sale report, the underlying hotels had 4,474 rooms and were valued at $2.034 billion (excluding the joint venture properties). Of course, the Great Wolf Lodge experience is more than just the hotels, but using that valuation, each room is worth an eye-popping $454,627.

What makes the transaction an interesting sign of the times is that Centerbridge Partners LP purchased Great Wolf Resorts in May 2015 from Apollo Global Management LLC for $1.35 billion.

No doubt capital has been expended over the past two years to increase the value of the portfolio, but the purchase stands out as particularly good given that Centerbridge now has all its capital back in its pocket and equity in the transaction of more than $500 million.

Apollo took Great Wolf Resorts private in 2012 for $703 million. No tears should be shed for Apollo given its outrageous success in Great Wolf Resorts over a few short years. Both successes can be attributed to the shifting tide in retail and consumer tastes where the focus is now on destination entertainment.

Retail properties continue to slug it out with online competition, and there is no sign of it abating.

Commercial mortgage-backed securities loans secured by retail properties represent over 30 percent of all such loans and are currently the most delinquent.

As of the end of September, 6.24 percent of retail properties using commercial mortgage-backed securities loans were delinquent, according to Trepp LLC, a New York-based provider of analytics and commercial real estate information. That compares to 5.84 percent of office property loans, 4.24 percent of industrial, 2.85 percent of hotel and 0.68 percent of multifamily property loans.

High rates cannot be blamed for loan delinquencies. According to the John B. Levy National Mortgage Survey, rates are up 0.25 percent from last month and are currently in the 3.5 percent to 3.9 percent range for 5- and 10-year loans offered by life insurance companies. Conduit pricing continues to be competitive and for 10-year loans now averages 4.15 percent to 4.45 percent for higher leverage loans.

The end of the year should bring an acceleration to commercial real estate activity as values move up. The activity is due to more stability in the commercial loan market.

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