From the Editor's Desk
Dear CCIM Members,

Inspite of the current economic times, there is actually a bright spot in the CRE business which is no doubt, Industrial Real Estate. This month, we will focus on this very solid asset class and how it has fared during the Covid-19 pandemic as we hear from members who primarily practice in this sector. From increasing e-commerce sales and greater demand for last mile distribution centers to data centers (i.e. the "Cloud") and new R&D facilities for healthcare, we will share what CRE practitioners have to say and how it stacks up against Office, Multifamily and Retail.

Secondly, we are proud to have launched the very first Virtual Dealshare event last week, which was 100% free to everyone who joined which included the presenters, other brokers and allied professionals (title and risk/insurance) and investors. Save the date for the next one in late September.

Lastly, we have re-formatted the newsletter in such a way to highlight the topic or category followed by the title of the article for ease of reading. We take pride to offer you timely and relevant news that will help you be more informed and hopefully give you additional insights into your own practice.

Thanks for reading!


-JR  (6 46) 481-3801

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CHAPTER EVENT RECAP:  1st Virtual Dealshare Event
Over 10 prime properties were featured by the presenting brokers with a total dollar volume of $112.35M including a 700-unit development in The Bronx, mixed-use office in Northern Jersey, religious facility with redevelopment opportunity, mixed-use retail/office/MF and various medical, office, retail and industrial net leased investments including a Tesla showroom. There was something for every type of investor. We will be presenting our 2nd Virtual (Secured Zoom) conference in the Fall, so please be on the lookout for the next event! We really hope you can join is for the next one. If you have an upcoming listing, be sure to let us know. We plan on expanding our event to "haves/want" including guest speakers. The camaraderie among our esteemed colleagues will continue to build. Finally, I would like to thank our Administrator Nicole Davis and Assistant Associate Executive Karen McGrath for their efforts in making everything run smoothly and so professional.  

Link to the deal sheet HERE .
NEWS FEATURE:  Industrial Real Estate
NAIOP June Coronavirus Impacts Survey Results Show Improving Conditions for Commercial Real Estate

Last week, NAIOP conducted its third survey of its U.S. members on how the novel coronavirus has affected their businesses and local markets. The survey examines the outbreak’s effects on conditions in commercial real estate and evaluates how firms have responded. The June survey results reveal that development conditions have continued to improve since May.

For the first time, NAIOP is publishing data it has collected on rent payments and tenant requests for rent relief over the last three surveys. As with other metrics, these data reveal gradual improvement in market conditions since April.

The survey was completed by 351 NAIOP members between June 15 and 17, 2020. Respondents represent a range of professions, including developers, building owners, building managers, brokers, lenders and investors.

Below is an overview of the survey results with direct quotes from the participants (in italics) followed by raw data from the survey and a profile of respondent characteristics. Results from May’s survey can be found here.

Continued Improvement in Conditions for Development and Acquisitions

Most of the outbreak’s effects on current development projects continue to soften. Two-thirds of respondents (66.1%) continue to report delays in permitting or entitlements since the outbreak, but other measures continue to improve (see chart below). Most notably, fewer respondents report a decline in leasing (49.4% vs. 57.2%) or delays in financing (16.1% vs. 23.3%) than they did in May. Local government restrictions on construction have also eased, with less than one-quarter of respondents reporting a mandatory halt, compared with about a third of respondents reporting mandated halts in May.

How has the coronavirus outbreak affected your current development projects?
Improved leasing and financing conditions are also likely contributing to increased development and acquisitions activity. The proportion of respondents who reported witnessing industrial, office and multifamily building acquisitions increased from May, and reported industrial and multifamily development activity also improved (see charts below). Industrial remains the strongest sector for reported activity, with the share of respondents observing new industrial development more than doubling since April (from 18.5% to 43.2%) and 70.7% of respondents witnessing industrial building acquisitions. Reported multifamily building acquisitions were also up sharply since May (from 35.6% to 49.1%). Reported office building acquisitions have improved modestly since April (from 32.6% to 37.1%), though new office development remains relatively uncommon. Retail development and acquisitions activity remains relatively uncommon, with 79.6% of respondents reporting that they witnessed no retail deals in the last three weeks (see the end of this post for detailed survey results regarding retail).
*These charts combine data for acquisitions of completed buildings and those currently under construction. See the tables at the end of this post for additional data.

“The industrial market is continuing to strengthen rapidly [and] we’re optimistic the market will continue to strengthen. The difference in market dynamics in the past 30 days is amazing.”
“Lenders are now very conservative in the underwriting and structuring of transactions, which will continue for at least the next 12 months.”

“Many institutional investors have not changed their return requirements, but they want to get those same returns by taking less risk. On the family office/private side, some are still moving forward with reasonable yield expectations, others have increased their yield requirements on the basis of relative value.”

June survey results also revealed an uptick in optimism about the duration of the outbreak’s effects. In May, we observed that there had been an increase in the proportion of respondents who expected that the outbreak would significantly affect their business operations for more than a year. That trend did not continue into June. Instead, a smaller share of respondents expects these effects to last more than a year, although that expectation remains more common than it was in April. Comments from survey respondents suggest that expectations for the severity of the outbreak’s effects may vary from state to state.
“We are pleased to see Florida restoring business activity in phases, but we are alarmed at the number of new COVID-19 cases. Still facing a lot of uncertainty.”

Rent Collection and Tenant Relief

Survey results reveal improved rent collection rates since April. Large majorities (69-74%) of respondents reported on-time payments by 90% or more of their office, industrial and multifamily tenants in June. NAIOP began collecting data on rent collections in the April survey, and is releasing it with this month’s results now that we have three months of data for comparison. These data reveal improving rent collection rates across office, industrial, multifamily and retail tenants.

Across all three surveys, a majority of respondents reported that 90% or more of office, industrial and multifamily tenants paid their rent in full and on time. For these three property types, collection rates improved in May, with relatively minor differences in collection rates between May and June (see charts below). Since respondents own or manage differently-sized portfolios, survey data only provide an indirect measurement of late payment rates, but the distribution of responses suggest it is likely that average late payment rates were below 10% for these three property types in June.

Respondents reported substantially lower on-time payment rates for retail tenants in all three surveys. Retail rent collections improved in May and June. Nonetheless, 69.9% of respondents reported that 75% or fewer of their retail tenants had paid their rent in full and on time in June.
*The survey asked what percentage of tenants had not paid their rent in full and on time by the 15th of each month. These charts display the difference between this percentage and 100%.
NAIOP also asked respondents what percentage of tenants in each property type had requested rent reduction or relief. The data from this question closely tracked reported late payment rates (detailed data are listed in the full survey results at the end of this post). The percentage of respondents reporting tenant requests for relief declined across all property types from April to June. Requests for relief are least common among multifamily tenants and most common among retail tenants.
A majority of building owners and operators continue to offer tenants relief by delaying and amortizing rental payments or adjusting lease length in exchange for rent relief, but expect tenants to provide evidence of financial hardship. The proportions of respondents reporting these practices have changed only slightly since April. By comparison, other practices, such as asking tenants about business interruption insurance or helping tenants to apply for benefits provided by government programs, have become slightly less common. The June survey results reveal a slight increase (from 26.2% to 32.5%) in the percentage of respondents who had lowered a tenant’s rent or offered them free rent periods. This may suggest a decline in effective lease rates in some markets.

Although we have not furloughed any of our 3,500 employees, our business is now down 25% from a high of 50% as the economy re-opens. We have had 3 active COVID cases which caused us to quarantine approximately 25 people for a period of time. Financial impact of paying people during their quarantine was approximately $75K.”

“We have maintained all our staff [and] allowed a few who requested it to continue to work from home. [We] limited staff in the office to 25% as some staff work between two offices. We have provided all the PPE for our employees and set up the office for social distancing.”

Building Safety

June data on the adoption of building safety measures were broadly similar to those from May. A majority of building owners and managers continue to report more frequent cleaning, distributing hand sanitizer and disinfectants to tenants and closing amenities in common areas. Slightly more respondents in June (21.4%) reported screening visitors for coronavirus symptoms than in May (17.0%). Fewer respondents reported closing properties due to state or local mandates (22.5% vs. 29.6% in May), suggesting that more buildings have been able to reopen as government restrictions ease. There was also a decline in the percentage of respondents who reported closing properties for additional cleaning when an occupant or visitor reported testing positive for coronavirus (24.7% vs. 33.2%). This may indicate a decline in the rate of tenant-reported infections, or that more building owners have developed alternative measures to sanitize an area that do not require closing an entire building.

“Occupants who telework are not looking for rent relief and their business operations are stable. Likewise, [we are] encouraging internal employee telework situations for all non-maintenance or on-site asset based services, [and are] continuing to see excellent productivity, engagement and work output from employees.”

Source: NAIOP
TECH CORNER:  Tech’s ever-evolving impact on the multifamily space
Well before the residents of multifamily properties were asked to shelter in place, they sought to shelter in comfort. Simply put, tenants want nice things. They want the best amenities. They want to coddle themselves. They particularly want technology that makes their lives easier, and they are willing to pay for it.

The coronavirus pandemic, and the economic upheaval that resulted from it, has called into question whether the latter will remain the case. But the initial shock to the multifamily space was not as dramatic as first feared. A National Multifamily Housing Council study of 11 million apartments found that 84 percent of the residents had paid their April rent by April 12. That was understandably down from a year earlier, when 90 percent had paid by that date, but not as dire as might have been expected.

So for now, at least, multifamily property owners are holding the fort. It will be a challenge to ensure cleanliness in their buildings and maintain social distancing among residents. But there is the hope that governmental measures like stimulus packages and loans will soften the economic blow that closed businesses and led to layoffs and furloughs. There is the hope that apartment dwellers will stay right where they are, as was the case a year ago. The nationwide occupancy rate surged to 96.2 percent in July 2019, its highest since 2000, and stood at 95.8 percent by year’s end. In Chicago it was 94.9 percent for Class A properties, and 94.8 for Class B properties.
There is plenty of uncertainty ahead, to be sure. But in one way, at least, the amenity wars anticipated the pandemic by making allowances for those who work remotely. Specifically, buildings have increasingly included common areas and meeting rooms replete with high-speed internet and other accommodations for telecommuters. That’s not at all surprising, considering 43 percent of the respondents to a Gallup study said they worked remotely at least some of the time in 2017, up from 34 percent in 2012. Now, with the spread of COVID-19, more and more people have not only chosen to work at home, they have been required to.

As in other areas of life, this is a new normal in the multifamily space. Back in a simpler time—like, say, January—the challenge was a familiar one for those who owned or invested in such properties: how do you keep ahead of the amenity curve (especially the tech aspect of that), and thus attract and retain renters?

A 2017 study concluded that 86 percent of Millennials would shell out for gadgets, which makes sense, considering the tech-savvy of that age group. But the same study showed that 65 percent of Baby Boomers were also willing to do so. A more recent survey indicated that 57 percent of renters would be willing to part with as much as $20 more per month if it meant their apartments would be equipped with such things as smart locks and thermostats, as well as security cameras.
Randy Fifield, chair of Chicago’s Fifield Cos., argued in a Multifamily Executive piece that renters are actually getting plenty of bang for the buck when it comes to amenities. She pointed out that if a building has a gym, residents no longer have to worry about a monthly gym membership, and if the building is in an urban center, they can use ride-share services and thus save on the costs associated with owning and insuring their own vehicles.

There are other benefits associated with the most-desired (and most basic) tech—smart locks and thermostats. Smart locks provide “sidewalk-to-sofa” safety, i.e., the ability for a resident to negotiate his or her way through a building’s main entrance, elevator and unit door while using a single electronic credential.

Speaking of versatility, managers have discovered that smart locks, when used in combination with security cameras, can also serve as a method to monitor the use of amenities like exercise rooms. They can reveal unsanctioned subletting and be used to assess staff performance. They can even lead to savings on insurance costs. The latter in particular is not to be taken lightly, as smart locks are not cheap; they run between $200 and $500 per door. But those costs can be offset, not only with those insurance savings but with the aforementioned rent bump.

In short, there doesn’t seem to be much downside to adding more gadgetry to a multifamily property. And the giants of the tech world have taken note. Google, Amazon and to a degree Facebook are in “an all-out war” to “integrate themselves more in the lives of tenants” according to Roelof Opperman, principal at Fifth Wall Ventures.

That figures to continue. Maybe not immediately, given the disruption resulting from the pandemic, but certainly at some point, somewhere down the line. Again, people always want to shelter in comfort. They always want the best for themselves. And multifamily owners have always been eager to oblige.

Source: RE Journals
LOCAL NEWS/RETAIL:  Almost One-Third of NYC Restaurants Missed June Rent, Survey Finds
LOCAL NEWS/RETAIL:  Almost One-Third of NYC Restaurants Missed June Rent, Survey Finds

The majority of restaurant owners around the city did not pay their entire rent in June, with 30 percent skipping out on it altogether, as the coronavirus pandemic continues to make it harder for eateries to survive, a new survey found.

The nonprofit New York City Hospitality Alliance surveyed 509 restaurateurs around the city and found four out of five didn’t pay the full June rent. Of those, 90 percent said they paid half or less last month.

“Pre-pandemic, it was incredibly difficult to run a successful restaurant,” Andrew Rigie, the executive director of the Hospitality Alliance, said. “These conditions, the longer that it goes on, is going to make it more and more challenging for small businesses to ever recover. The vast majority of small businesses will not be able to pay back months of missed rent.”

The survey also found that landlords have been unwilling to give restaurants a break.

Sixty percent of restaurant owners said their landlords refused to give them deferments during the pandemic, while only 10 percent were able to renegotiate their leases.

Restaurant owners are “hanging on by a thread and they’re exhausting their personal savings in the hope of one day getting their business up and running again,” Rigie said.

Even with the challenges and debts piling up, owners said most aren’t looking to close up shop.
“The idea of walking away right now is not something that most folks want to do,” said Karl Franz Williams, the owner of Harlem’s 67 Orange Street cocktail bar who was able to get a rent break from his landlord. “They want to figure out how to make it through. [Owning a restaurant is] not something most of us are doing just for the fun of it.”

Emergency restrictions put in place to curb the spread of the coronavirus forced restaurants and bars to switch to take-out and delivery models since late-March. Owners dealt with a significant drop in revenue and were forced to lay off thousands of workers.

The city began to ease restrictions in June as the number of cases dropped and last week restaurants and bars were allowed to start outdoor service. While that has helped, Rigie said that most of the extra funds generated from outdoors sales immediately went to rent and other expenses.

And as the number of people infected with coronavirus began spiking in other states around the country, Gov. Andrew Cuomo indefinitely postponed the return of indoor dining around the city this week, which was scheduled to start on July 6. Rigie said the move could cause more restaurants to permanently shutter.

Willimas said the return of indoor dining likely won’t be the shot in the arm for restaurants most people think it will be. He owns an eatery in New Haven, Ct., The Anchor Spa, which has been allowed to start indoor dining but the spot is still doing 30 percent of its pre-COVID-19 sales.
“We’re not back yet, we’re still struggling and indoor dining is not the end-all,” he said. “There’s still a lot of trepidation of being inside a small space.”

Plus, landlords and other debtors will think it’s business as usual once indoor dining returns and will come to collect debts, Williams said. And re-opening indoor seating too soon could be the death knell for many businesses if a second-wave hits.

“The only thing worse than delaying restaurants opening indoors is to have them re-open and then shut down shortly thereafter because of a spike of COVID cases,” Rigie said. “While there’s an urgency to start opening and generating revenue, there’s a great fear that it can result in a spike of coronavirus and that would further devastate the industry and make it more unlikely that these businesses will ever recover.”

What would be a bigger help than returning indoor dining for owners would be for the government to step in with either rent subsidies, deferrals or other methods to keep restaurants alive, Rigie said.

“We need all levels of government, the banks, the landlords and the commercial tenants to come together and figure out how to deal with this situation,” he said. “We just can’t keep ignoring it.”
Another form of relief would be to extend take-out and delivery alcohol sales along with the cap of third-party delivery fees implemented during the pandemic until months after the epidemic finally wanes, Williams said.

“Everything is uncertain right now, we don’t know if there’s going to be another wave,” he said. “That’s why I really hope that our elected officials will make some of the things that they’ve given us more permanent. Running your business in a total state of insecurity, where you don’t know what’s going to happen, is not a way to run your business.”

Source: Commercial Observer
NATIONAL NEWS:  REIT Industry June Rent Collection Data
Nareit is surveying its membership about monthly rent collections in the wake of the COVID-19 pandemic and related closures. The June results show an improvement for most sectors compared with last month with large improvements in the retail subsectors for free standing and shopping center-focused REITs. This improvement suggests that re-openings of the retail sector in many parts of the country in May have had a positive economic impact for retail REITs. for a full description of the surveys and results.

There are 35 equity REITs in the sample across six property sectors (industrial, apartments, office, health care, free standing retail, and shopping centers). The data come primarily from three surveys conducted by Nareit, supplemented by public disclosures of rent collections. The sample represents 61% of the FTSE All REITs total equity market capitalization for those property sectors. Sectors are only reported where survey participation is sufficient to maintain participant confidentiality. Table 1 and Chart 1 show the estimated REIT rent collections in April, May, and June as a share of typical rent collections. The results are displayed by property sector and are weighted by respondent REIT equity market capitalization.
REITs are getting creative as they sharpen their focus on sustainability, taking aim at environmental, social and governance issues with solutions that range from rooftop organic gardens to sophisticated disclosure systems, according to a new report by Nareit.

The association’s second annual REIT Industry ESG Report finds that 84 of the top 100 REITs—representing 89 percent of the sector’s total equity market capitalization—publicly report on ESG issues, which Nareit defines as environmental stewardship, social responsibility, and good governance. That figure is up from 78 percent in 2018, as more than two-thirds of Nareit members surveyed say that investor demand for that reporting has continued to grow over the past year.
On social responsibility, for instance, member REITs showed a significant improvement in their rates of reporting and disclosure in 2019, Nareit found. Members focused on such areas as tenant engagement, community development, and diversity and inclusion initiatives, as well as health, safety and wellness programs.

 AvalonBay Communities earned special mention for its social engagement program, called Building Strong Communities, which delivered $2.2 million in cash and in-kind donations and more than 14,000 volunteer hours to a panoply of charitable organization last year. Launched in 2015, the program focuses on affordable housing, disaster relief and support for at-risk populations.
“The investment in the social and philanthropy side is designed fundamentally to ensure that we’re not only acting within the four walls of our buildings, but extending to the communities beyond,” said Mark Delisi, AvalonBay’s vice president of corporate responsibility and energy management.

The program features a multi-year, nationwide partnership with the American Red Cross, along with a series of local partnerships tailored to the needs of each market. “The Red Cross fits well because we have about 148,500 people that live with us, and disasters large and small that hit them—everything from a small flood in an apartment to a larger thing like Hurricane Sandy or the California wildfires,” Delisi said.

AvalonBay, which owns or has an interest in 297 communities with a total of 86,846 apartment homes, delivered the donations and volunteer hours to more than 260 charities last year. “There’s a lot of expertise sharing that goes on, in addition to the traditional going out and chopping lettuce, painting fence posts and cleaning up overgrown bushes,” Delisi added.

The REIT’s efforts are in keeping with those of others canvassed by Nareit, which observed that its members are increasingly focused on building partnerships with vendors, service providers, education nonprofits and other organizations to further their social goals. In one variation on that theme, last year Prologis expanded its Community Workforce Initiative program, which began in Los Angeles through a partnership with EXP, a nonprofit specializing in workforce development.
The program aims to provide skilled labor to the logistics industry through foundational education and technical skills training. More than 920 individuals have completed the program or are currently enrolled.

Boosting Disclosure

Rendering of the Farley Building in New York City, which Vornado Realty Trust and its partners are redeveloping into a creative office hub with retail space and a new train hall. 

Some of the most important and innovative ESG work, however, is being done behind the scenes, in the prosaic realm of building operations and filing procedures. Vornado Realty Trust, for example, took the novel approach of furnishing its 2019 ESG Report to the U.S. Securities and Exchange Commission via an 8-K filing, a form that is used to announce major events that shareholders should know about.

The company’s ESG disclosures are aligned with the real estate-specific metrics codified by the Sustainability Accounting Standards Board (SASB), which recommends filing the metrics with the SEC via a 10-K report. But this practice, Vornado found, created a timing challenge.

“Vornado’s 10-K is filed with the SEC in February,” said Daniel Egan, senior vice president of energy and sustainability at the REIT, which operates nearly 30 million square feet of prime office properties. “The data for ESG is often not readily available by February.” Energy consumption data, for instance, which makes up a large part of ESG reporting, is not available until utility bills for the previous year come in, which might not be until February or March.

“We determined that an alternative would be to file an 8-K with the ESG Report as an exhibit. So our ESG Report, which contains all of the relevant data, including our SASB disclosures, comes out the first week of April, on the same day as our Chairman’s Letter and our corporate annual report,” Egan said.

“By furnishing the information in our ESG Report to the SEC, it sends a message to shareholders that an item of significance has occurred.”

Consumption Curbs

The reporting system underscores Vornado’s achievements as the nation’s largest owner of LEED-certified property. The REIT’s tenant- and landlord-focused energy management strategy has resulted in a 24 percent reduction of energy use across the portfolio since 2009, with a commitment in place to further shrink that number to 50 percent by 2020.

The vertically integrated REIT pays its own utility bills and manages its own energy. The vast majority of tenants are submetered off of its property’s main utility fees, so Vornado has access to consumption data for the entire building.

“We are in communication with our tenants as frequently as possible to discuss broader ESG issues but very specifically their energy footprint, and what could be done within the design or operations of their space to improve efficiency,” said Egan.

Vornado has been investing in energy efficiency for the better part of a decade, and its strategy includes updating and retrofitting older buildings to make them competitive with newer properties.

Environmental sustainability is a growing concern for the publicly traded REIT sector, which accounts for nearly $2 trillion in gross real estate assets. According to Nareit, 51 percent of the top 100 REITs with environmental performance disclosure reported on carbon emissions and energy usage in 2019, while 47 percent disclosed water usage and 39 percent disclosed waste management. Those figures represent year-over-year increases in all three categories.

Source: CPE Executive
MULTIFAMILY/AFFORDABLE HOUSING : GSEs extend coronavirus forbearance for multifamily mortgages, renters
Fannie Mae and Freddie Mac's regulator is allowing multifamily borrowers to extend coronavirus-related forbearance agreements on loans another three months for a maximum of six months.
Landlords must continue to suspend evictions for renters who can't pay in order for borrowers to receive forbearance, according to the Federal Housing Finance Agency. The FHFA also extended its suspension of single-family evictions.

Borrowers who have multifamily loans from the government-sponsored enterprises will get up to 24 months to make up their missed payments.

In the event that the repayment schedule is changed or a new forbearance plan is entered into, tenants must get at least a 30-day notice to vacate and can't be charged late fees or other penalties for nonpayment of rent.

Tenants also must be given flexibility to repay back rent over time rather than as a lump sum.
"During the pandemic, FHFA has been focused on protecting renters and borrowers while ensuring the mortgage market functions as efficiently as possible," said Director Mark Calabria in a press release. "The multifamily mortgage forbearance extension announced today will help renters stay in their homes and help property owners retain their properties."

Agency/government-sponsored enterprise portfolios and mortgage-backed securities represented nearly half of the multifamily debt market in the first quarter, according to the Mortgage Bankers Association. The dollar volume of debt in this category also constituted 20% of the larger commercial/multifamily market during that period.

The MBA's figures are based on an analysis of data from the Federal Reserve Board's Financial Accounts of the United States report, the Federal Deposit Insurance Corp.'s Quarterly Banking Profile report and information from Wells Fargo Securities.

Source: National Mortgage News
MORTGAGE NEWS : As Distressed Loans Surge, CMBS Borrowers See Control Shift to Special Servicers
The volume of commercial mortgage-backed security loans in need of help surged in April and may only be a precedent to a bigger escalation yet to come.

That swell has put borrowers of currently more than $23 billion in loans at the mercy of special servicers: a small group of firms assigned to CMBS deals that perform workouts, coming up with strategies to meet obligations for distressed mortgages. While special servicers are ultimately responsible to CMBS bondholders, they can also go into negotiations looking after their own interests.

That situation was evident this past week when one of the newest players in the field, Argentic Services Co., took over a multibillion-dollar workload from LNR Partners, the special servicer with the largest volume of work going into the coronavirus pandemic. Founded in late 2019, and only in operation a couple months, Argentic's new servicing business proved to be in the right place at a turbulent time, as the pandemic upended global economies.

Argentic comes to the task backed by firms that originated some of the loans, and it owns some of the bonds itself. The potential for protecting its own interests is not unique to Argentic as a special servicer. In fact, the potential for conflict of interest is a well-known risk to investors and cautions are written into every CMBS deal. In addition, servicing agreements include rules about what servicers can and cannot do.

The newcomer did not have to search hard for business. The volume of CMBS loans sent to special servicers in April jumped by nearly 65% to $23.7 billion from $14.4 billion a month earlier. Hotel loans were the main contributor, with the special servicing balance more than quadrupling to $9.6 billion from $1.8 billion, as myriad properties nationwide have either shuttered or drastically reduced their operations as a result of the COVID-19 outbreak, according to bond rating agency DBRS Morningstar. Many servicers found themselves swamped with work.

“No other market participants have been challenged more than CMBS servicers,” DBRS analysts noted in a recent report. “Borrower requests regarding payments came flooding in, requests for suspension of automatic payment processing, inquiries about forbearance, and other forms of payment relief quickly numbered in the thousands … and the numbers continue to increase daily.”

Large Transfer of Servicing Rights

As caseloads swelled, some borrowers that had been working with veteran servicer LNR saw their loans shifted to newly established Argentic, a subsidiary of New York City-based Argentic Investment Management.

Argentic had only been approved by Fitch Ratings to be a CMBS special servicer since March 26. Argentic officials did not respond to requests for comment from CoStar. Details of the company’s formation and emergence were available in multiple CMBS regulatory filings and from bond-rating agency reports.

Argentic Investment is not new to the CMBS world. Its affiliates are involved in CMBS loan origination, and importantly as buyers of the lowest-rated stack of bonds in CMBS offerings — so-called B-pieces. Other firms employ a similar cyclical strategy giving them the ability to make money in good times by making loans and in bad times by servicing them.

Argentic Investment typically purchases the B-pieces in transactions where affiliated companies have contributed a significant amount of collateral. Since 2016, Argentic Investment has purchased 16 CMBS B-pieces for a portfolio of 822 loans totaling $11.8 billion as of year-end 2019, according to recent CMBS filings.

B-piece bondholders have the right to appoint the special servicers of their choice, since they would be the first to suffer a loss from soured loans.

That occurred last week when Argentic Investment B-piece holders replaced LNR as special servicer on 12 U.S. multiborrower CMBS deals with Argentic Services. This transfer also included the servicing of companion loans included in 23 other CMBS deals.

It was one of the largest, if not the largest, single transfer of servicing rights, according to Moody’s Investors Service, which determined that the transfer would not result in a downgrade or withdrawal of the current ratings for the underlying bonds. That essentially was a vote of confidence in Argentic.

With the transfers, Argentic’s workload grew to more than 900 loans with an unpaid balance of about $13.5 billion as of March 31, according to CMBS records.

Also as of March 31, Argentic had eight employees responsible for special servicing of commercial mortgage loans and was in the process of hiring at least three more. In addition, the firm has entered into an agreement with Argentic Investment to share nonservicing support staff.

In March, Fitch Ratings assigned Argentic a level three special servicer rating. That indicates Argentic demonstrates proficiency in overall servicing ability. Fitch’s rating reflected Argentic’s short operating history, small staff size and its ownership's ability and willingness to improve the borrower experience by maintaining responsibility for material servicing decisions.
Last month, Fitch affirmed LNR’s special servicing level one rating. A level one demonstrates the highest standards in overall servicing ability.

Growing Loan Workload

The transfer of servicing rights was but a blip in the workload of LNR, which is owned by Starwood Property Trust. LNR is the largest CMBS special servicer by active loan count and balance, according to CMBS filings.

“Our special servicer has not been busier in the seven-plus years we have owned LNR. We have onboarded over 500 loans since COVID-19, representing over $14 billion in assets," Jeffrey DiModica, president and managing director of Starwood, said last week during an earnings conference call. “Having doubled the amount of assets we are working on, we have repurposed multiple professionals to help the servicer work through this backlog and expect revenue to increase in the coming years.”

LNR’s special servicing portfolio included about 6,425 loans with a balance of more than $93 billion in 185 CMBS transactions at the end of 2019, according to CMBS loan documents. It employs 177 people and continues to grow.

“We're writing fewer conduit loans,” DiModica said, “so we've been able to repurpose a significant amount of people to help to service or bridge this short period of time where we're onboarding so many new loans. But it's the beauty of having a very large company.”

While the amount of loans in special servicing in April hit $23.7 billion, there are multiple indications the total will continue mounting.

During the two weeks ending April 26, servicers collectively received 1,301 inquiries from CMBS borrowers, totaling $48.5 billion, according to Fitch, which cautioned that relief inquiries were expected to increase this month.

Also, a loan becomes delinquent after it misses two consecutive payments and ends up being transferred to special servicing. Loans that have missed one month of interest are classified as late but within a grace period. Those loans were also on the rise in April, which serves as another indicator of more special servicing work coming.

Source: National Mortgage News
NATIONAL NEWS : A Tour of Delinquincy Rates across the U.S. Metro Statistical Areas (MSAs)
The last few months have been met with an unprecedented rise in delinquencies in the CMBS market. With over 90% of remittance data reported thus far in June, the overall CMBS delinquency rate across all property types is lurking very close to the all-time high of 10.34% which was registered in July 2012.

During the last financial crisis, the delinquency number had risen gradually, from under 1.5% in January 2009 to up to 10.34% in mid-2012. Unlike then, this time around the overall CMBS delinquency rate which was 2.29% in April 2020 skyrocketed up to 7.15% in May. As of recent data, it is looking like the June number will be above 10% – a catastrophic 8% increase in just the past two months.

We have recently covered how delinquencies are spread out across various sectors – with lodging and retail seeing the largest increase. In this piece, we discuss how this increase in delinquent loan balance is spread across metropolitan statistical areas (MSAs).

Of all the MSAs, a little less than a third of the private-label CMBS balance is concentrated in just five MSAs alone – New York, Los Angeles, Chicago, Washington DC, and San Francisco. Of these, the New York-MSA accounts for over 18% of the total CMBS balance followed by the Los Angeles-MSA at 5%. However, when it comes to the delinquent balance, the ranking changes substantially.
The following table lists the top 20 MSAs in the descending order by delinquent balance and also lists their delinquency rate.
Like the broader market, the majority of the delinquent balance for these MSAs is on account of the delinquent loans in the lodging and retail sectors. Interestingly though, the Minneapolis-MSA does show an industrial delinquency rate of 36.25%. Digging in further shows that is on account of two industrial REO loans totaling $19 million.

Similarly, the Houston-MSA has recorded a high office delinquency rate of 13.89% which is mainly on account of six office REO loans but also two loans which are 60 days behind payment. These include the $8.6 million Cypress Medical Plaza loan and the $12.3 million 333 Northbelt Houston loan.

For the $8.6 million Cypress Medical Plaza loan, first-time special servicer commentary in May noted that the top tenant (which had 50.3% of the space) has vacated ahead of its September lease expiration. The collateral is a 46,380-square-foot medical office in Cypress, TX. The loan makes up 1.27% of WFCM 2016-C34.

For the $12.3 million 333 Northbelt Houston loan, the loan has been with the special servicer since October 2018. The special servicer commentary reveals that the borrower filed for bankruptcy in January 2019 and a ruling by a judge on a plan confirmation hearing is currently pending. The note is backed by a 220,717-square-foot-office in Houston, TX. The loan makes up 1.04% of the remaining collateral behind MSBAM 2014-C19.

Separately, using Trepp's database, we can also track how delinquency and special servicing rates have been faring for various MSAs. For instance, the following graph shows the numbers for the Los Angeles-MSA in the past 12 months.

As the overall US CMBS delinquency rate inches up, the impact across various geographies across the US will differ depending on the compositions of loans backed by various property types loan and also the severity of the pandemic in the location.

Source: Trepp
INTERNATIONAL : Hong Kong's Office Market Vacancy Rate Reaches 12-year High
Political unrest, Coronavirus outbreak still impacting Hong Kong's property markets

International property consultant JLL's latest Property Market Monitor is reporting this week that Hong Kong's Central's Grade A office rents fell 2.7% to HKD 102.4 per sq. ft in May 2020 as the vacancy rate reached 5% for the first time since the Global Financial Crisis in 2008.

Overall office rents dropped by 2.2% month-over-month in May 2020. The sharpest decline was recorded in Tsim Sha Tsui and Kowloon East, where vacancies were the highest among the major office submarkets. Figures from JLL's research show, the vacancy rates in Tsim Sha Tsui and Kowloon East grew to 6.5% and 13.7% respectively last month.

Alex Barnes, Head of Markets at JLL in Hong Kong said, "Rising vacancy continued to exert pressure on rents, but the decline was milder than in previous months. Central's Grade A office rents dropped by 2.7% m-o-m in May after it fell 4.5% m-o-m in April," "As uncertainties persisted and landlords became more willing to lower their rental expectations, tenants tended to renew their leases in order to save on capital expenditure," he added.

Nelson Wong, Head of Research at JLL in Greater China also commented, "In the overall Grade A office market, it recorded a negative net take-up of 196,500 sq. ft in May due to the slowing leasing demand. In Central, the market recorded a negative absorption 115,600 sq. ft, the highest monthly net withdrawal in more than one year."

 New lettings were mostly concentrated in premises outside of Central. Two finance firms have leased a total of 18,900 sq. ft at Lee Garden Three in Causeway Bay as they sought for more cost effective options outside the traditional business districts.

Source: World Property Journal
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