Once again, a high-profile commercial property that made headlines for the eye-popping scope of its acquisition deal a few years ago has re-entered the spotlight due to impending failure. The 11,000-unit Peter Cooper Village and Stuyvesant Town apartment complex in New York is reportedly destined for default.
A joint venture involving Tishman Speyer Properties and a unit of BlackRock Inc., which acquired the property for $5.4 billion in 2006, is currently experiencing rapidly depleting reserves, the Wall Street Journal recently reported.
With $33.7 million left of $400 million in interest reserves set up for debt service, the entire reserve may be depleted by the end of the year. The loan may be transferred to its special servicer, CW Capital, by the end of the month.
Moreover, the property is now worth less than half of its 2006 purchase price, and large institutional investors – including state pension funds – expect to be wiped out.
‘The failure of the high-profile investmentâ�¦ would further rattle the market for apartments, offices, hotels and other commercial property,’ the WSJ noted. ‘The market this year has seen increases in loan delinquencies and property foreclosures, stoking worries that it will drag down the nascent economic recovery.’
Indeed, the news of Stuyvestant Town's imminent default arrives against a backdrop of fresh concerns raised about the commercial mortgage sector's mounting struggles.
‘The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is CRE lending,’ stated FDIC Chair Sheila Bair during an Oct. 14 Senate Banking Committee hearing titled ‘Examining The State Of The Banking Industry.’
Despite commercial mortgage-backed securities' (CMBS) period of market vibrancy during the commercial real estate boom, FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, which means their exposure to CRE loans – and potential losses – is at a historic high, Bair noted.
Furthermore, the noncurrent loan ratio among nonfarm, nonresidential properties has quadrupled over the last two years, and the FDIC expects the ratio to worsen as large volumes of CRE loans come due during an era of fallen property prices and extremely tight financing availability.
In an effort to stem the tide, the federal banking agencies plan to release guidance on CRE loan workouts shortly, added Bair. ‘The agencies recognize that lenders and borrowers face challenging conditions due to the economic downturn, and are frequently dealing with diminished cashflows and depreciating collateral values,’ she said.
Bair's ominous assessment of CRE was echoed by Daniel K. Tarullo, a member of the Board of Governors of the Federal Reserve, who described the contrast between an overall economy displaying increasingly positive signs and a commercial property sector that continues to deteriorate.
Existing property prices have declined 35% to 40% from their 2007 peaks, he noted. In combination with reduced demand, stalled development projects and other indicators of a market in distress, the resultant losses ‘will place continuous pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans,’ Tarullo warned.
Tarullo also offered further details on the forthcoming interagency guidance addressing CRE loan workouts.
‘The guidance will reiterate that the classification of a loan should not be based solely on collateral value, in the absence of other adverse factors, and that loan restructurings are often in the best interest of both the financial institution and the borrower,’ he said.
Although the exact content of the guidance has yet to be released, it can be assumed that the popular tactics known as extend-and-pretend or delay-and-pray will have little place in the banking agencies' prescription for healing the market.
‘The expectation is that banks should restructure loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss mitigation,’ Tarullo stated.