Property Type Snapshot: Can Hotels Hold Their Ground in 2017?
Major gateway markets across the US received record high tourism levels throughout 2016, exceeding the low expectations set because of geo-political issues and economic volatility. Tourism and leisure spending is forecast to rise even more in 2017, as consumer confidence has been on an upward trend this year so far, which many attribute to the Trump administration’s potential for deregulation. Though the lodging sector posted solid overall performance last year, many are cautiously observing whether it can remain steadfast against last year’s hurdles of new supply production, the rise of alternative accommodations, and the subsequent softening in property values and income growth.
According to Trepp data, the average occupancy rate for lodging properties backed by CMBS loans is 74.4% as of February 2017. A recent TreppTalk blog stated that the national hotel occupancy rate improved just 10 basis points to 65.5% in 2016. The highest growth rates were observed in secondary markets, West Coast metro areas, and Washington D.C. Some major markets, including Houston, Miami, and New York, posted negative growth rates. CMBS loan issuance for the lodging sector reached a healthy $13.0 billion, though this is still down from its recent yearly peak of $21.7 billion in 2014.
Lodging CMBS issuance came in at $842.0 million in February, down slightly from the recent 12-month average of $1.08 billion. The highest monthly issuance recorded in the past year was $3.96 billion this past November, nearly $3 billion of which were single-asset/single-borrower (SASB) loans. In February, a total of $461.0 million across 26 conduit loans was securitized, and $381 million was issued between two SASB notes. Conduit loans represent 54.8% of the lodging CMBS paper issued over the last 12 months, while SASB loans comprised 42.0%. The remaining 3.2% of the balance issued fell under the large loan category.
February loss dispositions for the lodging sector were relatively high, as about 10% of the month’s total liquidation volume paid off with losses. This is up from the 12-month average, which came to 2.7%. Loss severity came in at 52.2% last month, pulling the six period moving average up to 36.7%. Still, this average has been on a decline since the year-high of 65.1% measured last March. The average loss severity hit a low of 29.1% in December.
Over the next six months, approximately $14.5 billion across 378 lodging CMBS loans are coming due. Currently, 3.7% of this balance is currently in special servicing, and 2.9% is delinquent. The weighted average DSCR for loans maturing in the next six months is 1.70x, though loans maturing in March possess the lowest weighted average of 1.31x. The sector’s performance reflects a resilient tourism industry, as travel and leisure spending has still increased enough to offset the obstacles posed by high supply and the rise of alternative accommodations. However, the “uneven” growth from 2016 is a trend to watch. Although investors are beginning to tap into the growth potential within secondary markets, this shift may also come with a drop in lodging demand for some higher-priced major markets.
New Conduit Issues Continue to Price at Drum-Tight Levels
CMBS cash trading was muted in the middle of last week while a major snowstorm swept through northern New York and Connecticut. By the closing bell on Friday, overall volume for the week reached $360 million. Cash spreads at the top of the stack largely held steady, while the BBB- rack at the bottom tightened modestly for new issues. A number of “D” class paper from new vintages traded tighter than expectations on Thursday, which helped pull in spreads.
In terms of CMBX, spreads leaked wider early in the week, but narrowed in sympathy with Wednesday’s equity rally after the Fed raised interest rates for the third time since the financial crisis. In light of the strong February jobs report and other data pointing to continued economic expansion, the Fed bumped up rates to a target range of 0.75% to 1%, with plans for two more rate hikes throughout 2017. CMBX spreads moved in quite a bit after the announcement on Wednesday, but pared off some of these gains on Thursday. For the week, CMBX 6/7/8/9/10 AAA spreads were largely unchanged while BBB- spreads widened between 19 and 33 basis points.
Two single-borrower transactions with horizontal risk retention structures priced last week, including the $1.02 billion CST 2017-SKY transaction backed by the Willis Tower in Chicago. Spreads cleared at impressively tight levels for that deal, with the AAA pricing at 80 basis points over swaps, and the BBB- coming in at S+225. The very next day, the $1.1 billion JPMDB 2017-C5 conduit printed at S+89 for the long AAA class, only one basis point shy of 2017’s best. Lower down the credit stack, the single-A priced at S+170 while the split-rated, class D BBB/BBB+ bonds cleared at S+255. Spearheaded by JP Morgan and Deutsche Bank, the largest loan in the horizontal risk retention deal is an $80 million slice from a $370 million mortgage backed by a retail condominium in Times Square.
In the CRE space, JCPenney released its official list of 138 store locations flagged for closure on Friday, which represents 13%-14% of the retailer’s physical store count. The closures reflect the retailer’s vision for long-term growth and profitability as it shifts its focus on omnichannel strategies. Liquidation sales will commence on April 17th. As we detailed in our email alert on Friday, the overall impact for CMBS is smaller than anticipated: exposure spans 11 CMBS loans totaling $894.4 million across 13 deals. The most notable loans to footnote are the $388.5 million Palisades Center note, the $278.2 million Franklin Mills loan, and the $10.3 million Hilltop Mall mortgage. Earlier this week, closure lists for Gander Mountain, Gordmans, and RadioShack all started making their way around various news outlets. The full exposure lists for the aforementioned retailers are featured on our In the Spotlight section.
New Conduit Issuance
Trading and CMBX Spreads
CMBS Swap Spreads
Legacy LCF Price and Swap Spread Movement
Top Credit Stories from the Week
- New York Office Tower and maryland Portfolio Win Refinancing (WBCMT 2007-C30 & more)
- Appraisal Values Chopped for Three New Jersey Offices (BSCMS 2007-PW15)
REITs and the March Rate Increase
For the second time since December, the Federal Reserve has upped the benchmark interest rate by a quarter point to a target range of 0.75-1.0%. The news of the rate hike caused government bond yields to drop, but added to gains across all three major stock indexes on Wednesday. According to Seeking Alpha, REITs also rallied by over 2% immediately following the announcement, confirming that REIT investors should not fear interest rate increases.
The REIT market’s response to the March rate hike closely mirrored that of the December rate increase—REITs tumbled leading up to the rate hike, dropping sharply this past October and November. The REIT ETF indexes similarly declined by 2% and then 4.5% in the two weeks leading up to the March rate hike. However, REITs immediately recovered both times, rising as soon as the rate was actually increased. Furthermore, in the 16 periods since 1995 that experienced significant rate hikes, “equity REITs generated positive returns in 12 of them or 75% of the time.” It appears that the market tends to overreact in anticipation of the rate hike, but regains buyer confidence after investors recognize that higher rates do not necessarily devalue REITs. The current growing economy supports superior business fundamentals for the sector, such as rising rent growth, occupancy levels, and cash flows.
While there are some negative impacts of a rate increase on REITs—such as less demand for acquisitions and higher cap rates—the fact that REITs have historically performed well after rate increases can assure investors that rate hikes reflect a healthy, growing economy, which is the core fundamental for real estate and REIT performance. This promotes a positive outlook for the year ahead, as two more hikes are anticipated for the remainder of 2017
Evolution of the CMBS Market
The CMBS market has undergone substantial changes since its start in the mid-1990s. Prior to development, mortgages against middle-market commercial properties in secondary and tertiary markets were often provided by savings and loan institutions. When hundreds of S&Ls failed in the early 1990s, the market came to a screeching halt.
The federal government formed the Resolution Trust Corporation to clean up the mess that remained. Wall Street and the RTC began selling nonperforming loans by packaging them into bonds. It eventually packaged performing loans as securities, and CMBS was born.
The market began to gain momentum in the early 2000s, issuance became steady at roughly $50 billion annually. Then things picked up rapidly. In 2003, $77.8 billion was issued, followed by $93.8 billion the following year. Issuance breached the $100 billion mark in 2005 when $168.2 billion was issued.
Bond investors were eating up investment-grade securities, driving spreads and yields lower. This allowed lenders to offer lower rates and greater loan proceeds. In 2007, $230.5 billion of CMBS was issued, a 13.7% jump from 2006.
The markets collapsed. Regulators, in an effort to legislate against future collapses, decided to mandate that issuers retain some of the risk in the securities they issued. Their target was residential mortgages, which drove the collapse, but CMBS was caught in the cross-hairs.
And here we are now. Fannie Mae and Freddie Mac fund nearly all residential mortgages today and are exempt from the risk retention rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law in 2010.
CMBS issuers have to abide by the rule, which requires an issuer to maintain skin in the game. They can chose to keep a vertical slice, amounting to 5% of face value of every deal it issues, or it can sell a horizontal slice, amounting to 5% of the deal's market value, to a qualified investor. Many viewed the rule as an illiquidity tax because issuers or buyers of the horizontal slice, the B-piece, wouldn't be able to trade out of their positions. That restriction comes with a cost.
The belief was that borrowers, the owners of middle-market properties across the country who turn to securitized lenders for fixed-rate loans that generally have 10-year terms, would end up picking the costs. Issuers would simply pass the cost along. That would have made CMBS conduit lenders less competitive with other lender types. While that was the case early on, there's little evidence it's still happening.
Who's bearing the burden of the new rules, the illiquidity tax? It depends. When issuers adopt the vertical risk-retention structure, it's clear they are. When deals are structured with a horizontal or hybrid risk-retention structure, where both vertical and horizontal pieces are retained, the B-piece buyer swallows the cost. They too can't trade, leverage or hedge their investments.
The good news is that bond investors continue to buy CMBS, as evidenced by the stable spreads at which bonds have cleared, and has kept lending open.
U.S. East Coast Gasoline, Diesel Demand Spikes Then Declines Due to Winter Storm Stella: Supply Side
Winter Storm Stella, a widespread blizzard across the mid-Atlantic and New England states on March 14, 2017, slashed gasoline and diesel demand as the inclement weather kept drivers off the road, according to Genscape Supply Side data. However, demand appeared to be boosted on March 12 and 13 by consumers filling up their tanks ahead of the winter-weather warnings.
The blizzard warning on March 14 spanned across New England and the mid-Atlantic, from Pennsylvania north to Maine. New York, Boston, and Philadelphia appeared to be spared from forecasted heavy snow, but parts of upstate New York recorded 30 inches of snow on March 14, and parts of Pennsylvania, Connecticut, New Hampshire, Vermont, and Maine saw 20 inches of snow, according to various news sources. The National Weather Service had blizzard warnings in effect for parts of New England until early morning on March 15 as the last of the snow persisted.
Total PADD 1A (New England) gasoline rack activity fell 69 percent and diesel rack activity fell 69 percent on March 14 from the previous day amid the winter storm, and PADD 1B (mid-Atlantic) rack demand dropped 65 percent on March 14 compared to the previous day. Diesel rack activity also declined in PADD 1B on March 14 from the previous day, down 75 percent from March 13.
When looking at individual states, rack activity for both gasoline and No. 2 diesel appeared to spike on March 12 and March 13 before dropping significantly amid the blizzard. For gasoline, Connecticut saw the largest jump in rack activity on March 13, up 46 percent from week-ago level to six million gallons. During the storm on March 14, Connecticut gasoline rack activity fell to just 820,000 gallons, nearly 81 percent below the previous Tuesday.
In New Jersey, gasoline rack demand jumped 30 percent on March 13 above the previous week to 14 million gallons, and fell almost 73 percent to the previous week during the storm to just 2.8 million gallons on March 14.
For No. 2 diesel, the largest week-on-week jump in rack activity prior to the winter storm was seen in New Hampshire, where activity rose nearly 117 percent on March 14 to over one million gallons. During the storm on March 14, the largest declines were seen in Connecticut and New Jersey. In Connecticut, diesel rack demand fell 94 percent from the previous week to just 140,000 gallons on March 14. In New Jersey, diesel rack activity dropped nearly 86 percent from the previous week to just 375,000 gallons during the winter storm.
Inclement weather, like a blizzard, can affect gasoline and diesel sales as driving demand declines due to hazardous conditions. By measuring refined products rack activity, Genscape’s Supply Side data shows the full market impact of weather events.
Genscape Supply Side data is derived from actual transactions at the rack level, where gasoline and diesel are distributed from secondary storage terminals to retail stations. On average, Genscape covers 72 percent of total gasoline rack activity and 68 percent of total diesel rack activity. This rack activity data can be used as an indicator or retail (or tertiary) refined products demand. To learn more or request a trial of the Supply Side data, please click here.
Property Type Snapshot: Is There an Undersupply in the Industrial Sector?
Growing companies rely on the critical functions of industrial properties for the vital tasks of e-commerce fulfillment and global distribution. In addition to those factors, demand for these spaces continues to rise thanks to increased import levels. The number of manufacturing jobs has been on a steady incline since early 2011, so external factors point to a healthy sector. In CMBS, that same sentiment can be shared as average occupancy for industrial properties climbs, delinquencies have been down, and credit quality of newly issued loans is sterling. Still, there are factors at play for market participants to monitor in the near term.
In a recent market survey conducted by Xceligent, 74% of participants said their greatest concerns for the commercial real estate industry over the next 12-24 months are supply and demand issues. Many of the survey participants commented that the industrial segment has been noticeably more active, and sector-wide vacancy is very low. Several have voiced concerns that there is an undersupply of industrial space. According to Trepp data, the average occupancy rate for industrial CMBS loans has increased annually over the past five years. Average loan occupancy rose from 91.9% in 2011 to 95.7% in 2016. As of last month, the industrial sector continued to average the highest occupancy among all major property types at 96.0%. With occupancies ascending, the level of supply could be reaching an inflection point.
While the volume of 2016 industrial issuance trailed the prior year’s total, it still eclipsed the $3-billion mark, a feat that has been achieved annually since 2014. The number of industrial properties securing private-label CMBS loans shot up to 1,055 in 2015, which is well over the amount securitized for the previous three years combined. Trepp data shows that single-asset/single-borrower (SASB) transactions have been a major contributor to industrial CMBS activity over the past two years, accounting for 62.7% of private-label issuance in 2015, and 26.1% in 2016.
The industrial delinquency rate has fallen significantly in the past two years, and came in at 5.94% last month. This is a substantial improvement from its peak of 12.7% in 2012. Industrial demand had its most acute uptick begin in 2015, which translated to highly elevated issuance levels and a markedly improving delinquency rate. Over the past two years, the industrial delinquency rate began to closely approach the national delinquency curve. Last month, the spread between the two tightened to just 0.66%.
E-commerce is a major factor that continues to drive the industrial sector forward; and industrial loans are riding on great momentum into 2017. However, Tony Argiro from CBRE observes “at this time, demand for new buildings is slightly above supply… A flood of new construction could easily disrupt the industrial market and lead to asking rates dropping.” Thus, the spike in occupancy rates and property values are tied to the sector’s current surplus of demand. Ultimately, future sector performance can either be positively or negatively influenced by the amount of new construction in the pipeline.
5 Largest CMBS Loan Losses - February 2017
After reaching a 12-month high of $1.4 billion in January, CMBS disposition volume remained elevated in February as 47 loans totaling $956.8 million were disposed last month. Due to several large office and lodging dispositions, average loan size also rose from $14.6 million in January to $20.4 million, which is the highest level recorded in over 20 months. Despite increases in overall volume and average loan size, overall loss severity dropped over nine percentage points to 48.76% in February.
Office loans incurred the highest realized loss amount last month at $228.3 million total. Retail and lodging loans followed with $129.2 million and $85.2 million, respectively. Office loans alone comprised 50.1% of February’s disposition volume. Retail loans represented 20.8%, followed by lodging loans at 17.1%. Retail loans carry the highest loss severity of the three, climbing 11% from January to 64.8% last month.
Below are the five CMBS loans that incurred the largest losses by amount per February’s remittance updates.
1. Connecticut Financial Center - B note
The $60.4 million B note behind the Connecticut Financial Center incurred the largest loss in February, as it was disposed in full. The collateral is a 464,256 square-foot office in New Haven, Connecticut that features Yale University as its largest tenant. Although the $70 million A note also suffered a loss, it came in well shorter than that of the B note at just a 1% severity. Unlike other loans that are disposed, the Connecticut Financial Center was only in special servicing for a little more than two months before the write-down. The debt was transferred to special servicing in November for an imminent monetary default. Servicer commentary stated that the most recent building occupancy was 86%. Though the loan was not carrying an appraisal reduction, the value of collateral was reduced from $163 million at securitization to $65.7 million in December. The B note made up 7.57% of BACM 2007-2 prior to disposal, a deal which has lost 9.30% of its original collateral via write-offs.
2. James Center (GMACC 2006-C1)
The second-largest loss incurred in February belonged to the $100 million piece of debt behind the James Center. Both the $100 million and $50 million notes were disposed last month: the larger piece suffered a $36.7 million loss for a 36.7% severity, while the $50 million note behind a separate 2006 deal was closed out with an $18.3 million loss (36.6% severity). The James Center complex is a trio of office towers in Downtown Richmond, Virginia that span 1.01 million square feet. After being transferred to special servicing in June 2014 due to a major tenant vacating one of the properties, the assets were turned back to the lender. The seller, LNR Partners, took control of the buildings last March with a deed in lieu of foreclosure from JEMB Realty. JEMB Realty bought the complex in 2005 for $184.4 million. The $100 million portion of the James Center debt comprised 36.91% of the collateral behind GMACC 2006-C1. 11.38% of that deal’s collateral has been wiped out due to bond losses.
3. The Harrisburg Portfolio
Backed by three offices in Harrisburg and one in Mechanicsburg, Pennsylvania, The Harrisburg Portfolio was closed out with the third-largest loss last month. Originally issued for $61 million, the $39.3 million portfolio was closed out with a $35.9 million loss for a 91.27% severity. The office collateral totaled 671,759 square feet, though the portfolio was originally backed by 16 office/flex buildings. After being transferred to special servicing in February 2013, the servicer began marketing the properties for sale. DSCR (NCF) and occupancy hit 1.38x and 91%, respectively, in 2009. Those levels fell to 0.99x and 75% in 2010, and later 0.07x and 55% in 2015. The most recent appraisal reduction amount (ARA) on the portfolio was $23.3 million, so the loss exceeded that estimation. Prior to disposal, the loan made up 27.04% of CD 2006-CD2. That deal has lost 14.78% of its original bond balance to write-downs.
4. Minneapolis Airport Marriott
The $57.6 million loan behind the Minneapolis Airport Marriott incurred the fourth-largest loss in February. With a realized loss of $34.7 million, the note was written down at a loss severity of 60.23%. The note is backed by a 293,345 square-foot Marriott hotel located in Bloomington, Minnesota near the Minneapolis-St. Paul International Airport. After it was made known that a refinancing would not take place before the June 2016 maturity date, the loan was transferred to special servicing. DSCR (NCF) reached 1.34x in 2011, but that dropped to 1.14x in 2013 and 1.02x for the most recent 12-month period. Occupancy has remained between 67% and 72% since 2011. With an ARA just under $38.5 million, the loss undercut the expected tally. Valued at $90.8 million in 2006, the collateral was re-appraised for $23.2 million in 2016. The note comprised 14.28% of BACM 2006-3 prior to the write-off, a deal which has lost 15.18% of its original collateral.
5. DDR/Macquarie Mervyn's Portfolio (GMACC 2006-C1)
Last but not least, one of the loan pieces behind the DDR/Macquarie Mervyn's Portfolio was closed out with the fifth-largest loss last month. The slice of debt in question was a $34.8 million note that incurred a $34.5 million loss, amounting to a 99.16% severity. The note totaled $106.3 million at securitization, but was whittled down thanks to the sale of numerous pieces of collateral. Originally, the portfolio was backed by 35 retail centers across California, Nevada, and Arizona, but only eight remained at the time of disposal. The portfolio was transferred to special servicing all the way back in 2008 due to tenant bankruptcy. Over the course of the stay in servicing, the collateral appraisal was reduced from $397.7 million to $9.5 million as recently as June 2016. This slice made up 12.85% of the collateral behind GMACC 2006-C1.
For more info on CMBS loans that have been disposed with losses, drop us a line at email@example.com.
CRE Lending Remains Slow for a Second Consecutive Week
Bank share prices fell as investors appeared to reconsider the benefits of higher interest rates for bank earnings. A strong jobs report on Friday bolstered the expectation for a March rate hike by the Fed to a near certainty. Interest rates rose with the 10-year Treasury yield reaching 2.582%, an increase of 9 basis points.
The largest banks’ shares fell by -0.4%, while regional banks’ shares fell by -1.9%. Though this slight dip is most likely a temporary setback. Higher interest rates have been contributing to bank share price growth; as higher rates will contribute to bank earnings through higher net interest margins. However, if interest rates rise too far, too fast, loan demand could be negatively affected.
Overall commercial real estate lending growth was slow for the second consecutive week as two of the main CRE segments delivered disappointing results. Construction and land development lending contracted at a -2.5% annualized rate, the second negative rate in two weeks. Multifamily mortgage lending jumped back with a very strong 21.2% annualized growth rate after showing several weeks of slow growth. Commercial mortgages inched ahead at a 2.0% annual growth rate.
Total commercial real estate lending growth for the year-to-date slowed to 8.1%. The annualized growth rate for construction and land development fell to 10.6%. Multifamily properties’ annualized growth rate for the year-to-date rose to 8.0%, still well below the 12.7% annual pace in 2016. The annualized year-to-date growth rate for commercial mortgages declined to 7.5%.
NEWS FLASH: U.S. SBA Loan Program By Any Other Name…
If you haven’t gotten used to the new names for the SBA’s 7(a) and CDC programs, don’t worry. One of the first moves by the new U.S. Small Business Administrator appointed by President Trump was to rescind last year’s decision …
The post NEWS FLASH: U.S. SBA Loan Program By Any Other Name… appeared first on EDRnet.
What's In Store for Shopping Malls?
The shopping mall sector is taking a major hit with the extensive list of store closures and bankruptcies, which could ultimately lead to a decrease in the number of malls around the county. Sandeep Mathrani, chief executive of GGP Inc.,estimates that the number of malls could eventually shrink from 1,100 to 800, which amounts to a quarter of all US malls.
According to Kroll Bond Rating Agency, Inc. (KBRA), the riskiest properties might be those that host the "triple threat" of tenants: Sears, Macy's and JCPenney. Each of those firms have announced plans to close the doors on hundreds of locations in order to shore up their businesses. KBRA found that within the CMBS universe, 105 loans with a balance of $15.1 billion are backed by properties with the triple threat. Those are all at an elevated risk of default, particularly if their anchors close shop.
Typically, in-line stores (which pay the bulk of the rent at any mall) sign leases with co-tenancy clauses. If an anchor closes, those in-line stores can demand a reduction in rent, or they can vacate with little or no penalty. (Here comes the domino effect.) When an anchor vacates, a number of in-line stores can follow suit, which would result in a drop in foot traffic and then causes other anchors to leave, and so on. Soon, you could have a 1 million-square-foot echo chamber. But every property has its own story.
Examine the Foothills Mall in Tucson, Arizona. It was developed in 1983 by Bourn Companies and was positioned as a high-end mall, anchored by now-defunct department stores such as Levy's and Goldwaters. The property hit a rough patch in the early 1990s and was repositioned as an outlet mall. Business boomed and in 2006, the property was purchased for $104 million by a venture of Kimco Realty Corp. and Feldman Mall Properties Inc. The firms financed the transaction with $81 million of CMBS debt.
Then the real estate and capital markets collapsed. In 2010, it was sold to Schottenstein Property Group for $89.8 million. But its anchors included Linens 'n Things (which no longer exists), Saks Off 5th Ave., and Barnes & Noble.
The mall was hit again when Simon Property Group opened the Tucson Premium Outlets, and syphoned some retailers including Old Navy, Nike and Carter's. Saks was said to be moving as well. Cash flow at the property collapsed and its CMBS loan went into default.
Earlier this year, the property was sold back to its developer for $19.8 million. The buzz is that the property will possibly be redeveloped into apartments (though retail and perhaps office space are not out of the question).
Might a similar strategy be the game plan for other ailing malls? That remains to be seen. But most malls are located in what had been and, in many cases, remain primary locations. Though they may no longer be viable as retail destinations, they might have a second life as something else.
Take the Hickory Hollow Mall in Antioch, Tennessee as an example. Hickory Hollow was a 1.1 million-square-foot enclosed mall that had been anchored by a JCPenney, Dillard's and Sears. All of three of those retailers vacated, resulting in an exodus of the in-line tenants. It became a "dead mall" with only a dozen retail tenants.
Four years have passed, and the property has undergone a massive repositioning. Nashville State Community College took a slug of space previously occupied by Dillard's, converting it into a satellite campus. Another part of the property was converted into an ice hockey training facility, and a third into a public library. Yet another portion was converted into an international grocery store.
With retail caught in the crosshairs of changing consumer needs and preferences, prpoerty owners will certainly begin to weigh their options if the big-box firms are forced to contract.
Pair of New Conduits Price at Some of 2017's Tightest Levels
US stocks rose Friday morning following the release of a solid February jobs report, but later receded due to declines in energy and financial shares. The 235,000 jobs added to the economy last month came in considerably above the Wall Street Journal estimate of 197,000 new job creations, and will likely give the Fed the much-needed stimulus to raise rates again in March. For the month of February, the unemployment rate fell 0.1% to 4.7%, while workforce participation and average wages both continued to tick up. Earlier in the week, concerns over mass retail bankruptcies and closures, as well as the mounting oil glut fueled extensive sell-offs in the retail and energy sectors. The yield on the 10-year Treasury also closed at a 2017 high of 2.60% on Thursday, though it fell two basis points to 2.58% by Friday's closing bell.
The new issue CMBS market was active this week amidst jitters surrounding weak retail sales and plunging oil prices. Two large conduit transactions priced on Wednesday at levels that were tighter than those seen in the previous two conduits. The $1.09 billion JPMCC 2017-JP5 printed at 92 basis points over swaps for the long AAA, becoming the first conduit deal to feature the horizontal strategy for risk retention compliance. Spreads on the lower bonds of the JP5 transaction were not disclosed since the B-piece portion comprising the bottom 5% of the deal was sold to third-party investor LNR Partners.
Among the two conduits that priced, the $1.06 billion GSMS 2017-GS5 was highly favored credit-wise. The AAA cleared at 88 basis points over swaps and matched the pricing of the BACM 2017-BNK3 deal from early February, which previously ranked as the tightest conduit pricing for 2017 thus far. The BBB- ultimately cleared at S+315, or 30 basis points tighter than the BNK3 transaction. Originators of the GSMS conduit adopted an L-shaped structure that featured Goldman Sachs retaining a vertical strip amounting to 2.7% of the face value of the bonds, while Rialto Capital took the remaining 2.3% in the form of a horizontal slice. According to Commercial Mortgage Alert, JP Morgan has been putting two other conduit deals together that are slated for pricing in the next few weeks. Both of those deals will utilize the horizontal risk retention option.
In the secondary CMBS market, trading floors were relatively busy as roughly $585 million was out for bid between Monday and Friday. Cash spreads moved minimally up and down the stack, while the CMBX sector underwent some modest widening in the past week that gave back some of gains from the huge rally on March 1st. CMBX 6/7/8/9/10 AAA spreads were largely flat to two basis points wider. In the BBB- space, spreads moved out around 11 to 24 basis points.
CMBS Swap Spreads
Legacy LCF Price and Swap Spread Movement
Top Credit Stories from the Week
- California Industrial Portfolio to Special Servicing (CGCMT 2006-C6)
- Remaining Piece of Collateral for New Jersey Office Portfolio Sold (GSMS 2007-GG10 GCCFC 2007-GG9)
- Large Chicago Office Loan Sent to Special Servicing (BACM 2008-1)
Meager Property Acquisition Numbers via REITs May Continue in 2017
According to Commercial Property Executive, overall REIT acquisitions dwindled throughout 2016 while dispositions surged. Acquisitions for equity REITs were down 35% year over year, totaling $63.6 billion in 2016. The fourth quarter volume was the lowest quarterly total since the second quarter of 2010, at just $7.9 billion. On the other hand, dispositions soared to a total of $52.2 billion in 2016, which is a 31% year-over year increase and also “the highest annual figure in industry history.” The sky-high disposition volume caused the net acquisition level to plunge to just $11.4 billion last year, compared to $57.4 billion in 2015. It appears that many REITs are “taking advantage of the high prices to shed non-core assets in primary markets,” particularly apartment and office REITs which lead overall disposition activity.
Healthcare and retail REITs posted the highest gross acquisitions in 2016, as healthcare REITs acquired $9.4 billion and retail acquired $11.4 billion. Both amounts are still significantly down from $22.3 billion and $19.8 billion in 2015, respectively. Almost every major REIT property sector acquired less in 2016, with the exception of single-family homes and data centers. Single-family homes acquired $6.2 billion (a steep increase from $700 million in 2015), and data centers posted $5.2 billion compared to $2.7 billion the year prior.
National Real Estate Investor recounts that since stock prices for most public REITs fell below net asset values in the second half of 2016, the drop in mergers and acquisitions activity “was a function of REITs lacking sufficient capital and stock price valuations to carry out some of the transactions.” Dispositions were contrarily driven by the record-high prices in core markets, and global investors deploying large amounts of capital to the US.
On the positive side, the fundamentals for REIT returns still remain healthy. The FTSE/NAREIT All REIT Index posted a 4.2% total return in February, which was slightly above the S&P 500’s 4.0%. However, investors can continue to expect decelerated REIT acquisition activity in 2017, as the underlying market trends of high pricing, rising interest rates, and tighter lending are here to stay for the year ahead.
CRE Lending Hits Soft Patch
Bank share prices enjoyed strong gains for the week on the back of a broader market advance and, more importantly, as a result of interest rate increases. The largest banks’ shares rose by 3.0%, while regional banks’ shares picked up 2.1% for the week. The outlook for bank earnings got a boost from a steepening yield curve. The 10-year Treasury yield jumped by 18 basis points to end the week at 2.492%.
Expectations for future rate increases ramped up after Fed Chair Janet Yellen gave indications that the Fed would be accelerating its timeline on hikes in interest rates. In a speech on Friday, Yellen cited improvements in the US economy since mid-2016, namely the unemployment rate and the return of inflation, as support for a more rapid increase in the fed funds rate. She indicated that increases during 2017 would be more rapid than the pace during 2015 and 2016.
Overall commercial real estate lending growth slowed in the third week of February, with the pace of growth in all three of the major CRE segments declining. Construction and land development lending contracted at a -6.8% annualized rate, the lowest rate in the last twelve months. Multifamily mortgage lending inched ahead at a barely positive 1.2% annualized growth rate. Commercial mortgages slowed to a 4.0% annual growth rate. The weekly figures for all three of the major CRE segments were below the year-to-date trend so far during 2017.
Total commercial real estate lending growth for the year-to-date slowed to 8.0%. The annualized growth rate for construction and land development fell to 11.8%. Multifamily properties’ annualized growth rate for the year-to-date fell to 6.0%, well below the 12.7% annual pace in 2016. The annualized year-to-date growth rate for commercial mortgages declined to 7.6%.
Wall of Maturities Update: March 2017
The CMBS market will “spring” into action in March and prepare to digest $6.7 billion of maturing debt that is due this month. March’s total is the lowest of the next six months, as the amount of CMBS maturing by month only augments once April begins. What’s left to refinance are loans issued towards the end of 2006/2007 commercial real estate bubble, and whether or not the properties behind those loans meet today’s credit standards is unclear.
Based on a February 2017 snapshot,more than $235.3 billion in CMBS loans have paid off since January 2015 in any manner, including disposals with losses. Those disposed loans were written off with cumulative losses of more than $9.6 billion at an average loss severity of 44.74%.
In the 12-month period between March 2016 and February 2017, $114.2 billion in securitized mortgage debt was liquidated, 7.62% of which suffered losses at resolution. Those loans that were closed out with losses were written down at an average severity of 46.68%. Based on underwritten maturity dates for loans that were scheduled to pay off during this time frame, 981 loans totaling $29.4 billion are still outstanding.
Outlook: Upcoming Maturities
Over the next 6 months through August 2017, roughly $61.1 billion in CMBS debt will come due. 5.92% of that total is past due on payment, and 10.54% is in special servicing. As the two dominant property types, office and retail loans comprise 28.94% and 26.51% of the volume maturing during this time frame, respectively.
Out of the $6.7 billion in CMBS debt that is scheduled to mature in March, over 9.74% has fallen into default (categorized as 60+ days delinquent, in foreclosure, REO, or non-performing balloons), while 14.23% has been transferred to special servicing. Of all of the debt maturing in March, 8.79% is carrying an appraisal reduction amount (ARA) that could lead to potential losses at resolution.
The largest loan scheduled to mature in March is the $1.07 billion Five Times Square, which is evenly split into two notes. Those two loan pieces respectively comprise 28.18% and 21.95% of the balance for two separate 2007 deals.
This is the second iteration of the report Trepp will publish every month until the end of 2017 in an effort to monitor the wall of maturities as the market enters the home stretch of scaling this large amount of maturing CMBS debt.
Neglected Commercial Spaces: How Big Is the Problem?
BuildFax recently published a study about neglected commercial spaces. We looked at the more than 5.2 million commercial properties in our database and took a representative sample, where we have more than 30 years of data coverage. We flagged these properties for permit activity in 10, 20, 30 and 30+ year time frames. The results highlight:
- The surprising number of neglected commercial structures in the US (buildings that haven’t had a permitted update in over 30 years)
- A complete breakdown of neglected, aging, and maintained commercial buildings
To read the whole thing, click here or click the button below.
The post Neglected Commercial Spaces: How Big Is the Problem? appeared first on BuildFax Blog.
5 Largest CMBS Loans by Balance That Became Delinquent in February
The Trepp CMBS Delinquency Rate, which has been moving steadily higher over the last 12 months, continued to climb in February. January resulted in a rare pause of the reading's growth, but the rate resumed its upward trend in February. The delinquency rate for US commercial real estate loans in CMBS is now 5.31%, an increase of 13 basis points in February.
Over $1.5 billion in office loans turned delinquent last month, including the five largest new delinquencies by balance. Our list of those properties is below.
1. TIAA RexCorp New Jersey Portfolio
The largest loan to become delinquent in February was the $270.4 million TIAA RexCorp New Jersey Portfolio. The portfolio is backed by six northern New Jersey offices – three in Madison, two in Short Hills, and one in Morristown – that total over 1 million square feet.
In October 2016, the loan was transferred to special servicing due to an imminent balloon/maturity default. Per servicer commentary, the borrower “felt that the value of the collateral would not” make a refinancing at maturity possible. The portfolio was tagged as a “non-performing matured balloon” last month. However, Commercial Real Estate Direct recently reported that Mack-Cali Realty Corporation agreed to purchase five of the six collateral properties (as well as one other North Jersey office) for $395 million. The Morristown property is reportedly not part of the sale.
The TIAA RexCorp New Jersey Portfolio is the second-largest loan behind GSMS 2007-GG10, as it comprises 7.91% of the remaining collateral. Just 16.6% of that deal’s balance is backed by delinquent debt.
2. TIAA RexCorp Long Island Portfolio
Another TIAA RexCorp Portfolio comes in at second on February’s list, but this note’s collateral is located about an hour away from New Jersey (maybe even three hours, depending on traffic). The $235.9 million TIAA RexCorp Long Island Portfolio is backed by four offices in Melville, New York, and one in Uniondale.
The Long Island portfolio also became a non-performing matured balloon last month, as the borrower expressed an “inability to pay the loan in full at (its) maturity date” of 2/6/2017. However, watchlist commentary from January states that a refinancing is in the works. The most loan recent financials are as of September 2016, when occupancy was 95% and DSCR (NCF) was 1.46x. DSCR has increased in each of the past four years. Of all five properties that serve as collateral for the portfolio, the largest overall tenant is Citibank with 202,930 square feet at 68 South Service Road in Melville.
The portfolio makes up 29.7% of the remaining balance behind GCCFC 2007-GG9, making it the largest loan in that deal. 94.6% of the collateral (by balance) for the 2007 securitization is currently marked as delinquent.
3. TIAA RexCorp Plaza (A Note)
You’re not seeing triple: the third-largest loan to become delinquent in February almost shares the exact same name as the two larger notes. Though the $150 million A note for the TIAA RexCorp Plaza serves as debt for a different property, it is backed by a 1.06 million-square-foot office in Uniondale, New York that isn’t far from the Uniondale office behind the TIAA RexCorp Long Island Portfolio.
This A note was marked as non-performing beyond maturity in February for a missed balloon date. The $37.3 million B note behind the plaza was tagged with the same delinquency status last month. January watchlist commentary stated that the borrower “is working with two lenders to refinance the property and anticipates making a final choice between the two in mid-January.” The servicer has not yet provided an update as to this development. Through September 2016, DSCR (NCF) and occupancy clocked in at 1.93x and 91%, respectively. The building’s lead tenant is Farrell Fritz P.C. with 10.1% of the space, which amounts to 107,701 square feet.
The plaza represents 4.39% of the balance behind GSMS 2007-GG10, a deal which has 16.6% of its remaining collateral in delinquency.
4. Skyline Portfolio (B Note)
The last piece of once-current debt behind the massive Skyline Portfolio has turned delinquent. This month, it’s the $131.2 million B note behind BACM 2007-1 that has fallen into delinquency.
After being listed as going through the foreclosure process in September and October 2016, the note was made current in the following three months. However, the asset has been returned to the lender and is now REO. Four of the six pieces behind the portfolio are REO, while two slices that back JPMCC 2007-LDPX are still “in foreclosure.” The eight offices that collateralize the debt were foreclosed on in October. The B note isn’t carrying an appraisal reduction at this time, but most of the other Skyline pieces are.
The note comprises 28.7% of the collateral behind BACM 2007-1. 81.8% of that deal’s balance is backed by delinquent loans.
5. Omni Marathon Reckson
The final loan on February’s list is the $108 million Omni Marathon Reckson. Collateral for the note is a 660,223 square-foot office in Uniondale, New York.
Just like the loans that inhabit the first, second, and third spots on February’s list, the Omni Marathon Reckson became a non-performing matured balloon last month due to the borrower's “stated inability to pay the loan in full at maturity.” Property financials have been up and down since securitization. DSCR (NCF) fell from 1.42x in 2008 to 0.55x in 2012, but then rebounded to 1.42x at the end of 2015. The most recent financials measure the first nine months of 2016, which peg DSCR and occupancy at 1.16x and 100, respectively. The property was appraised for $184 million in 2007, and features Healthplex, Inc. as the lead tenant with 11.7% of the square footage.
For more information on newly delinquent loans and the current rate of CMBS delinquencies, send us a note at firstname.lastname@example.org.
The DOB is Updating their Penalty Schedule, and There’s A Huge Possible Change
If you’re familiar with OATH and the Environmental Control Board, you may be familiar with agency penalty schedules. Each NYC agency tied to ECB-associated hearings has a respective penalty schedule that outlines different infractions and their respective fines. While these penalty schedules previously existed under OATH’s section of the RCNY (Rules of the City of New York), they are now being moved to each individual agency’s chapter.
This move is being done for a few reasons:
- Penalty sheets will be closer to the actual agency regulations, making them easier to find
- Removing OATH/ECB’s need to approve proposed or amended penalties will speed up agency rule-making
So what does this mean for you? While many of the previous agency penalty moves were administrative in nature and had little immediate impact on owners and managers, the DOB’s adjustment is particularly interesting for one big reason.
Tucked into the proposed rule (read here) is new language for Section 102-01, Title 1 of RCNY, referencing reduced penalties for defaulted DOB violations. Here’s the exact proposed language:
(j) Reduction of default penalties upon proof of compliance. With the exception of daily penalties charged under section 28-202.1 of the Administrative Code for continued Class 1 violations of sections 28-210.1 or 28-210.3 of the Administrative Code, any imposed Default Penalty, Aggravated l Default Penalty or Aggravated II Default Penalty will be reduced by one-half (1/2) after: (1) Respondent files an acceptable certificate of correction with the Department; and (2) ECB receives notification from the Department of its acceptance of such certificate of correction.
According to the proposed subdivision, default penalties and repeat default penalties (with some exceptions) would have the fine reduced by half once correction has been filed and approved. Per DOB requirements, this involves submission of a Certificate of Correction directly to the agency (beyond and in addition to any proof provided at the hearing).
While this is possibly huge news, there’s also a ton of unanswered questions. Will this be retroactive? What is the timeframe for this reduction? How can named respondents actually take advantage of this? We’ll keep you posted on any additional information provided by the DOB. In the meantime, this adjustment is open for comments via e-mail, fax, and mail, and an in-person session on Wednesday, March 29th. Stay tuned to the blog for additional updates as this change is adjusted, adopted, and promulgated.Correcting DOB-ECB ViolationsWant to brush up on correcting a DOB-ECB violation? Check out SiteCompli’s Knowledge Center for basic steps and how-to’s.
The post The DOB is Updating their Penalty Schedule, and There’s A Huge Possible Change appeared first on SiteCompli.
Growth in Permian Production to Stress Outbound Infrastructure in Late 2017
As the price of West Texas Intermediate steadies in the $50-$55 per barrel (bbl) range, oil rig counts affirm operator commitments to growing production immensely in the Permian Basin over the next two years. Nearly half of all U.S. drilling rigs returned to service since rig counts hit a low in May 2016 have gone to work in the Permian Basin.
Total U.S. oil rig counts bottomed at 323 rigs in May 2016, as a result of crude prices falling to below $30/bbl. In contrast, oil drilling activity in the U.S. has trended up in the last year on an uptick in WTI prices and OPEC announced production cuts. Since the low, oil rig counts increased by 313 rigs, close to a 100 percent rise.
The Permian’s rig count was 295 on February 29, 166 higher than the low of 129 active rigs in the basin in May 2016. The theme of recovery has taken firm root, and drilling activity should increase through at least 2017, based on the current forward price curves for natural gas and oil. Genscape expects an additional 33 rigs to be added between now and the end of the year, bringing the total Permian rig count to 328.
As ever-increasing amounts of capital flow into robust drilling programs in the basin, Permian production is set to grow from around 2.2 million bpd to 2.8 million bpd by year end 2017, according to Genscape’s Spring Rock Production forecast. This incremental 600,000 bpd growth will be nearly matched in 2018 to the tune of a 500,000 bpd of expansion. Given that supply in the basin could see up to 50 percent growth between now and 2018, the natural question is: Will takeaway infrastructure be adequate to support such significant growth, and how soon might a lack of adequate takeaway become a constraint?
Permian Pipeline Infrastructure to Expand
Giving credence to the immediacy of this question, there have been several announcements in recent weeks to expand existing pipeline infrastructure. Magellan Midstream Partners announced plans to expand their 300,000 bpd Colorado City, TX-to-Houston BridgeTex pipeline by 100,000 bpd by Q2 2017, in a press release on January 24. Plain All American Pipeline announced plans to expand the 250,000 bpd McCamey, TX-to-Gardendale, TX, Cactus Pipeline system to 390,000 bpd by Q3 2017, according to a January 18 news release.
In their 4Q earnings call, Sunoco Logistics announced plans to expand their system by 100,000 bpd with the Permian Express 3 project expected to be in service in mid-2017. According to Sunoco, they also have the ability to add an additional 200,000 bpd utilizing existing infrastructure and can be staged as needed. Currently, Sunoco’s 300,000 bpd West Texas Gulf, 150,000 bpd Permian Express I and 200,000 bpd Permian Express II pipelines transport barrels from the Permian to Longview and Nederland, TX, markets.
Also in their 4Q earnings call, Enterprise Products Partners said it both expanded and moved up the start date for their new Midland-to-Houston pipeline. The company expanded the capacity from 300,000 bpd to 450, 000 bpd and moved up the start date from mid-2018 to Q4 2017.
Tightening Balance between Production and Takeaway Capacity
Based on the consensus evident in these midstream announcements and Genscape’s production outlook, the balance between production and outbound takeaway capacity will be tightening by the second half of 2017. Tighter pipeline capacity will result in a widening crude price differential between Midland and Cushing, which could widen enough to support rail economics to the Gulf Coast. However, the duration and magnitude of the impact to the Midland-Cushing spread will ultimately be determined by the timing of new infrastructure and when incremental production comes online.
Service Costs Keep Rising
The other primary, imminent concern on the speed of Permian production growth is rising oil production service costs. Operators continue to push the boundaries in the Permian on both the drilling and completion side. However, rising costs, especially for hydraulic fracturing services, continue to increase with activity. Many operators have been able to neutralize the effect of increased service costs on well economics via gains in both well and rig productivities. However, many operators are reporting between five and 15 percent increases in service costs.
As evidenced by strengthening rig counts and operator drilling plans, the Permian Basin is the area most poised for production growth in the United States over the next two years. The clearest threats to this production growth are resource constraints (labor availability, equipment availability, and increasing OFS prices) and takeaway infrastructure. Given the announcements by several midstream firms to expand takeaway infrastructure by the end of 2017, as well as productivity gains offsetting rising service costs at the moment, Genscape believes that Permian producers have every incentive to drill their next well.
Genscape's U.S. Crude Oil Production Report provides the most detailed, accurate five-year oil production report in the industry. The report includes proprietary data from over 20,000 individual wells, aggregated by basin and crude quality, and adjusted weekly to forward curve. To learn more, or to request a trial of Genscape's U.S. Crude Oil Production Report, please click here.
CMBX Spreads Tighten After Reaching Recent Highs
Secondary CMBS trading was subdued in the beginning of the week as industry leaders gathered at the Structure Finance Industry Group (SFIG) Conference in Las Vegas, but gained momentum with volume reaching $550 million between Monday and Friday.
As a result of President Trump’s address to Congress on Tuesday evening, which provided support for a pro-business agenda, US stocks surged to new highs. The rally was boosted by market optimism surrounding the new administration’s plans to reduce taxes, pull back regulatory requirements, and increase fiscal spending. Other market indicators that implied a positive economic outlook and potential for a March rate increase further fueled the strength in the equity markets. The Dow soared above 2100 points for the first time on Wednesday, while the S&P 500 closed higher on another week of gains.
The CMBX market rebounded from the immense sell-off in February with considerable gains across the board. For CMBX 6/7/8/9/10, AAA spreads tightened two to three basis points within the week. After several weeks of extensive widening at the bottom of the credit curve, BBB- spreads for series 7-10 came in between 38 and 43 basis points, while series 6 tightened by about 12 basis points. Spreads moved in by 21 to 48 basis points in the BB space. In the cash market, spread gains totaled five basis points at the top of the stack and over 20 basis points at the bottom.
CMBX spreads have been highly volatile in the past 30 days and hit their highest mark of the year on February 24th. Starting in late January, BBB- spreads for CMBX 6 moved out by 210 basis points to reach their recent peak, while those spreads blew out 134 basis points in series 7. Further down the curve, CMBX 6 BB spreads were 294 basis points wider from their mark at the end of January, and 192 basis points wider in CMBX 7.
The $634.9 million WFCM 2017-RC1 deal priced on February 28th, printing at 95 basis points over swaps for the LCF AAA class and 450 basis points for the BBB-. The conduit transaction grabbed some headlines last week when it was revealed that Argentic Real Estate Finance had voluntarily agreed to hold the B-piece portion of the deal for five years, despite not being the risk retention party. This week’s Commercial Mortgage Alert reported that two other conduits are currently in the queue for pricing. JP Morgan has been marketing the $1.09 billion JPMCC 2017-JP5 in the past few days, which will become the first conduit transaction structured under the horizontal risk retention option. B-piece investor LNR Partners will be holding the 5% horizontal slice at the bottom of the deal. The transaction is expected to be favorably received by investors, as early whisper talks suggest that AAA spreads could clear at 92 basis points.
CMBS Swap Spreads
Legacy LCF Price and Swap Spread Movement
Top Credit Stories from the Week
-Runoff for Seattle/DC Office Portfolio Nearly Complete (MSC 2007-IQ14 & more)
REITs Dip Slightly in February
According to NAREIT, the FTSE NAREIT All REIT Index fell back slightly last month, as it lost 0.3%. In comparison, the S&P 500 Index dipped 0.1%. However, the FTSE NAREIT All REIT Index for 2017 year-to-date is down 1.3%, while the S&P 500 Index has dropped 2.8%.
Infrastructure REITs was last month's top performing sector, which posted 9.01% total returns. According to Zack’s, the government’s plan to borrow and spend an immense amount of money on infrastructure projects should benefit the REIT sector, boosting rent and occupancy levels in the process. Single-family homes also soared in February with a 7.93% return. Seeking Alpha reports that home sales and prices are off to a strong start in 2017, with existing home sales exceeding expectations in January despite elevated mortgage rates. There is also little growth in the single-family construction market, and low inventory historically correlates to home price appreciation. Self-storage and timber REITs also performed well last month with 7.05% and 7.01% returns, respectively.
Contrarily, lodging was last month’s lowest performing REIT sector, totaling -1.22% returns. Hotel supply is expected to surge this year, which will put pressure on room rates. The lodging REIT sector may already be starting to suffer from oversupply, as 2017 YTD returns are down -3.76%. Shopping center REITs also dipped last month with -0.85% returns.
On the positive side, Q4 2016 earnings reports were more or less in line with many pundits’ expectations. A Zack’s article states that REIT earnings have “not been as bad as anticipated given Trump’s unexpected victory, a rise in 10-year US Treasury rates, and an unstable global market.” According to Edward Jones analyst Roy Shephard, “REITs are in “a good environment…relative to other financials in terms of their financing cost” as longer-term interest rates remained low and the yield curve flattened in February. So despite the slight pullback in February, the broader REIT sector seems to be standing on solid ground. However, Shephard noted that one thing to watch in the near future is the widening of spreads between the 10-year Treasury note and REITs’ borrowing rates in the bond market, which may particularly affect REITs with lower credit ratings.