Commercial Real Estate Outlook: Q2 2009 Richard Parkus Head of CMBS Research (212) 250-6724 All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. 21 July 2009 Between a Rock and a Hard Place
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Commercial Real Estate Outlook: Q2 2009
Richard ParkusHead of CMBS Research (212) 250-6724
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
21 July 2009
Between a Rock and a Hard Place
Richard Parkus (212) 250 6724 · date · page 2
The Rock…
Richard Parkus (212) 250 6724 · date · page 3
Speed of deterioration in loan performance is unprecedented, even with relative to early 1990s
Total delinquency rate reached 4.1% in June, 2.2 times higher than in March and 3.5 times higher than December
Delinquency rates likely to soar higher over next 24+ months on billions of dollars of pro forma loans that never stabilized and resetting partial IO loans
With 2,158 delinquent fixed rate loans ($27.9 billion) special servicers may soon be overwhelmed
DB CMBS Research projects term losses will reach 4.3-6.3% for the outstanding CMBS universe ($31.3-$46.4 billion), and 8.4-12.1% for the 2007 vintage
Richard Parkus (212) 250 6724 · date · page 4
Where we were at the end of Q1 2009…
Our view as of Q1 2009: Aggregate delinquency rate will be in excess of 3.5% by end of 2009, and 5-6% by late 2010
Annualized Rate of new 90+ delinquency Annualized Rate of new 90+ delinquency - 2007 Vintage
Richard Parkus (212) 250 6724 · date · page 12
Hotel loan performance beginning to crack
Total delinquency rate rose 39bp in April, 101bp in May and 118bp in JuneAccording to Smith Travel Research, average RevPAR is down 20% YOY This suggests far larger NOI declines due to high operating leverageBottom line: This downturn may well exceed that of 2001-2003, when cumulative default rates reached nearly 25% over a three year period
Deterioration has been relatively restrained to date
But declining production and collapsing international trade (i.e. many ports seeing cargo traffic down 30%) could pose problems for the demand for industrial space
Office delinquency rates remain relatively low, but the degree of deterioration is accelerating sharply
Given the deterioration in employment rates in general, and office employment rates in particular, we expect office to be one of the hardest hit property segments
Average monthly increase in delinquency rate over past four months of 30bp; 53bp increase in June
Most of these are now highly unlikely to stabilize, and are probably also exhibiting a significant degrees of negative equity
We expect that a very large percentage of these loans will default over the next 6 to 12 months, as their interest reserves are become depleted
Richard Parkus (212) 250 6724 · date · page 19
Partial IO loans exhibiting significantly greater performance deterioration post reset
Delinquency rate for reset partial IO loans roughly twice that of other loans
Number of partial IOs resetting each month remains high through mid 2012
Average increase in debt service of 20-25%
Source: Intex, Trepp
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Richard Parkus (212) 250 6724 · date · page 20
The Hard Place…
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Massive maturity default risk
We expect that 64.4-72.5% of loans (400-$450 billion) would not qualify to refinance were they to survive until maturity
With well over $2 trillion in commercial mortgages maturing between now and 2013 in CMBS, banks and life company portfolios, the scale of the potential problem is formidable
These problems are not the result of dislocated financing markets, rather they reflect the simple fact the majority of loans do not qualify for a loan large enough to retire the existing debt
Improvements in rents and vacancy rates are also extremely unlikely to be sufficient to materially affect the scope of the problems
Richard Parkus (212) 250 6724 · date · page 22
Commercial real estate price declines accelerating
Moody’s CPPI CRE price index was down 7.5% in May, after an 8.6% decline in April
The index is now off 35% from its peak in October 2007
The index is likely to reflect a much higher percentage of distressed sales going forward
* Percent calculated with respect to original balance
Projected Term Projected Maturity Projected Total
Richard Parkus (212) 250 6724 · date · page 32
Deutsche Bank
Important DisclosuresAdditional Information Available upon Request
Appendix 1
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.
Richard Parkus (212) 250 6724 · date · page 33
Special Disclosures
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subjectissuer and the securities of the issuer. In addition, the undersigned lead analyst has not and will not receive anycompensation for providing a specific recommendation or view in this report. Richard Parkus
Richard Parkus (212) 250 6724 · date · page 34
Deutsche Bank
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Richard Parkus (212) 250 6724 · date · page 35
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