(Bloomberg) — Morgan Stanley says commercial real estate will see a so-called K-shaped recovery from the pandemic, leading to stark winners and losers among holders of commercial mortgage-backed securities.
This bifurcation means that some deals will experience much higher realized losses than others, depending on factors such as bond, vintage and property type. Bonds backed by hotels, retail and offices are likely to see more struggles than those on industrial properties.
The split creates a market where due diligence and active management is key as investors seek to gain an upper hand amid the chaos.
“A bond picker’s market has emerged,” a team of Morgan Stanley analysts led by Richard Hill wrote in an outlook report Wednesday. For instance, a “market of ‘haves’ and ‘have-nots’ has emerged in BBB- (CMBS bonds), as idiosyncratic risks and rising loss expectations magnify quality tiering.”
This has led to scant trading opportunities for older BBB- CMBS conduit tranches. Investors are unwilling to sell the higher-quality bonds, while the lower-quality bonds lack sponsorship, the analysts wrote.
The CMBS market has struggled this year as Covid-19 kept shoppers out of malls, travelers away from hotels and workers home from offices. More than 1,400 CMBS loans totaling $29.3 billion are currently delinquent, Morgan Stanley said. Lodging and retail properties have the highest delinquencies, at 22.6% and 11.8%, respectively.
To make things more complicated, the overall CMBS headline delinquency rate of 7.8% “may be understated by 300 to 400 basis points, given a combination of forbearance and borrowers drawing down on reserves to pay current principal and interest payments,” the report said.
The bank’s expected-loss projections for CMBS conduits are in an average range of 5% to 7%, depending on which year a CMBS was issued. That could exceed 10% and even hit the high teens for specific deals that are more troubled, the report said.
Losses may reach as high as the AA ratings tier in certain bear-case scenarios, the Morgan Stanley research show, while lower-ranked classes will almost definitely see some realized losses, depending on the transaction.
“There is a wide range of deal-by-deal losses across all vintages,” Hill wrote, noting that additional stresses on lodging, retail, and office properties may cause loss projections to rise.
Despite the challenging picture of performance, CMBS issuance next year may surprise to the upside. The bank projects $60 billion to $70 billion in 2021 sales across conduit, single-asset, single borrower, and commercial real estate CLO offerings as maturities come due.
CMBS sales have reached about $54.4 billion so far this year, more than 40% lower than the same span in 2019, according to data compiled by Bloomberg.
Relative Value: CLOs
- Goldman Sachs Asset Management remains constructive on senior CLO tranches, as analysts think spreads have room for further compression and offer attractive carry for a short spread duration profile, according to a recent research note
- AAA rated CLO spreads have lagged other securitized credit sectors
- “Spreads on securitized credit sectors tightened following the U.S. election and positive vaccine developments, consistent with the improvement in risk assets”
“The way special servicers look at the vaccine news is, ‘Does this make the CMBS borrowers more likely to commit new capital to protect their equity? Will they now be more apt to commit capital?’” said James Shevlin, president and chief operating officer of special servicer CWCapital. “We hope the answer is yes, as some borrowers are in round two of forbearance.”
ABS deals in the queue include Volkswagen (auto lease) and ServiceMaster Brands (whole business). The latter transaction may price on Friday. CLOs from KKR and Symphony Asset Management may also price on Friday or next week.
©2020 Bloomberg L.P.
30 businesses in 30 days: Fort McMurray real estate agent pushes shop local campaign for Christmas – CBC.ca
A Fort McMurray real estate agent is encouraging people shop local by creating a video series called 30 businesses in 30 days.
This month, Melanie Galea started posting videos showcasing small businesses in Fort McMurray. From pet stores, to coffee roasters and spas, Galea has been trying to remind locals about what businesses they could be shopping from.
“It just seemed like it was needed more than ever,” said Galea.
“These business owners are ready for Christmas.”
She said there are concerns that businesses are going to be shut down and several businesses have already closed during the pandemic and flood.
“People are staying home, they’re maybe not spending quite as much money. Some businesses are doing well, but I’ve seen businesses shut down because of what’s happening right now.”
Galea did a similar promotion in 2015, making videos to showcase 30 businesses. Thirteen of those stores have since closed.
Galea put a call out for businesses to contact her about making a video, and she was even surprised to find out about companies she had never heard of before.
“It’s great to see there are new businesses,” said Galea.
“The reaction has been fantastic.”
Galea said her videos have even inspired former McMurrayites. She said a former Fort McMurray resident, now living in Edmonton, reached out to Galea to ask about buying gift cards from Fort McMurray shops.
The entire series took about 100 hours to create. She charged $50 per business to do the video, but it’s costing her more than $250 per episode.
“This is my give to the community,” said Galea. She started filming the series in the beginning of October.
Carley Johnson, owner of Firebag Coffee Company, started selling coffee and coffee accessories in February. She roasts coffee at her home in Fort McMurray and sells it online and at local markets.
Since her video went live, she’s had people reach out to her saying they didn’t know her business existed and says her sales have increased.
The company does free delivery in town, and she says they do about 25-30 orders a day.
“Since the video’s run I’ve probably had at least 5 to 10 new people contact me every day.”
“It’s wonderful,” said Johnson.
Michael Langille’s video hasn’t gone public yet — it’s slated for Dec. 9. He’s the owner of The Little Pet Company, which is in the midst of expanding.
“Some people think that we’re still shut down since the flood,” said Langille. “It’s about broadcasting that we’re here.”
He said many people thought the flood destroyed the shop, which it didn’t.
The store was “busier than ever” for the first few months of the pandemic, but recently noticed a “sgnificant change” in the number of customers coming in.
Langille said he doubled his store’s inventory with the expansion, but “we’re not seeing double the sales by any means.”
“We might’ve seen a ten per cent increase, which is not what you want to see when you’re expanding your business.”
He’s hoping the video gets people coming into the store, and spending their dollars in town, rather than online.
JPMorgan's Pil Sees Quick Return to Office Boosting Real Estate – BNN
(Bloomberg) — People will likely return to the office more quickly than expected and that will help boost the price of some commercial real estate, according to J.P. Morgan Asset Management.
Investors may be making a mistake by extrapolating the future from the current situation with lots of working from home due to Covid-19, according to Anton Pil, global head of alternatives at J.P. Morgan Asset Management, part of JPMorgan Chase & Co. Top malls worldwide should see a faster-than-expected rebound in traffic, he said, and there’s an overshoot in expectations about how many people will want the status quo versus returning to the office.
“I’m expecting a pretty significant rebound in valuation,” Pil said in a phone interview Wednesday. “Financing terms are at some of the lowest levels that we’ve ever seen, and the income generation continues to be quite strong, at least if you own top-notch offices in strong locations.”
Urban centers have been able to survive previous pandemics and will do so again this time, Pil said. He pointed to the co-working trend as evidence that even when people could work from home they found there was value in being around others.
However, investors are taking things slowly at this point, with commercial real estate dealmaking in the third quarter far below pre-pandemic levels, according to data from CBRE Group Inc. and Real Capital Analytics Inc.
Pil also said that easy monetary policy and available financing means that it’s harder to tell which companies have simply been hurt by the pandemic and which have business models that just aren’t viable. J.P. Morgan Asset Management has stuck to a relatively conservative approach that’s focused on the actual assets companies own, he said, to avoid potential trouble on that front.
Venture capital will be a very robust market over the next year or two, Pil added. Lots of new businesses will be started by people who were laid off or had salaries reduced during the pandemic, he said, plus the efficiency of working from home and broader adoption of cloud computing has made starting a business cheaper and easier around the globe.
©2020 Bloomberg L.P.
Toronto’s Real Estate Board Tells Brokers Stop Showing More Than 2 Years of Sold Data – Better Dwelling
Toronto’s golden age of real estate brokerage innovation is coming to an abrupt end. Toronto Regional Real Estate Board (TRREB) sent a memo this week, on sold data. The board informed brokers they will only be allowed to show two years of data going forward.
TRREB Ordered To Allow Brokerages To Show Sold Data
The board formerly known as TREB was sued by the competition bureau in 2011. The bureau argued it was anti-competitive to prevent real estate brokers from sharing sold information. This dispute went on for years, until the supreme court finally rejected any appeals in 2018. Shortly after, the board provided member brokers with a data feed, complete with sold data. Almost immediately, this brought Toronto real estate out of the dark ages.
Release of Sold Data Drove Brokerage Innovation
Allowing the display of sold data led brokerages to build a number of Zillow-like products. Some brokers began providing sold data to clients going back over a decade. Toronto’s formerly dated, agent-driven model, was suddenly refreshed. Buyers were able to research, without an agent acting as a direct barrier to information. Unfortunately, that wasn’t TRREB’s intention.
TRREB Memo Demands Halt On Displaying Data Over 2 Years Old
TRREB sent member brokers a reminder this week that included a restriction that was previously unclear. The board notes several restrictions, but the biggest one is how much sold data can be shown. The memo reads, “Only two (2) years of sold data can be displayed or accessed at any time on the VOW, Website, or App.”
The updated interpretation of the bureau ruling is going to have a big impact. Starting soon, brokerages will restrict sold data to just 2 years. Much of the innovation that allowed people to research on their own will disappear. Instead Toronto will return back to it’s agent-driven model, where individuals have to request details from agents. This coincidentally will also conceal readily available sold data from the 2017 detached frenzy.
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