It was reported recently that the first CMBS (commercial mortgage-backed securities) deal of 2010 is being prepared by the Royal Bank of Scotland. The $500 million CMBS offering is backed by existing loans that were refinanced and underwritten to stricter guidelines, reported the Wall Street Journal on March 31, 2010. This may be “a good harbinger for what we are expecting and hoping is a recovery in commercial real estate lending,” said Patrick Sargent, president of the Commercial 
Real Estate Finance Council. (GlobeSt. “The Resurrection of CMBS”, by Paul Bubny. April 1, 2010).
We might see more CMBS offerings coming to market, but there is a tremendous amount of troubles surrounding older, or legacy, CMBS loans. The Congressional Oversight Committee projected that about $1.4 trillion in commercial real estate loans will need refinancing between 2010 and 2014. However, many of these are underwater or distressed, and tight credit markets are creating problems for refinancing.
The CMBS market exploded between 2004 and 2007. There was $1.7 trillion new CMBS issued in 2007, three times the total issues between 2000 and 2003, as reported in Pensions & Investments on April 5th, 2010.
The tremendous amount of CMBS distressed debt is weighing on the U.S. To date in 2010, loans serving as collateral for CMBS issues have accounted for 72% of the newly distressed situations, sharply up from 40% in 2009, according to Real Capital Analytics (RCA). There is $157 billion dollars of troubled situations, they say. RCA noted that workouts may be increasing. Lenders resolved $14.7 billion in distressed situations at the end of February 2010, but it is still a small portion of the overall problem.
Realpoint LLC reports in its CMBS delinquency report that unpaid balances of overdue loans in February 2010 reached $48 billion. Seventy-seven percent of these loans were originated between 2005 and 2007.
Adding to the situation, Fitch Ratings recently said that they plan possible downgrades on $25.5 billion worth of floating rate CMBS transactions. Those loans were underwritten with proforma assumptions that haven’t materialized, Fitch says. $20 billion of the bonds were already placed on “watch negative” in December.
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