CMBS Special Topic: Outlook For The CMBS Market in 2011

CMBS Special Topic
Securitized Products Research | Americas
Outlook for the CMBS Market in 2011 09 DECEMBER 2010
Key Themes in the CMBS Market

 Property Fundamentals: As the economy slowly recovers, occupancy and rents at Fixed Income Research
commercial properties are starting to rebound. However, because of the steep drop in
Contributing Strategist
occupancy levels during the previous recession, net operating income will continue to be
weak across all property types through 2011, resulting in a steady stream of new
delinquencies. Lea Overby
+1 212 667 9479
 Commercial Property Prices: Commercial property prices are likely to continue lea.overby@nomura.com
bouncing along the bottom as more distressed assets hit the market, while stronger
trophy assets garner increased investor interest. This report can be accessed electronically
via: www.nomura.com/research or on
Bloomberg (NOMR)
 Maturities: Although the $38bn in loans set to mature in 2011 have a weaker profile
than those that matured in 2010, they will benefit from increased credit availability and
investor appetite. We expect that 60% of loans coming due will be able to refinance,
while another 10% will receive a maturity date extension.
 New Issuance: Much of the new issuance pipeline will be driven by maturing loans. We
project that conduit new issuance is likely to be around $45bn in 2011, with single
Table of Contents
borrower deals adding another $10 to $20bn.
Page
 Modifications: Servicers are most likely to modify loans that are only moderately Fundamentals and Pricing 2
distressed, while choosing instead to foreclose or sell deeply underwater loans. New Issuance 4
Modifications are likely to moderate the level of delinquencies and to postpone and Loan Maturity Risk 5
mitigate ultimate losses. Loan Modifications 13
Collateral Performance 18
 Delinquency Rates: We expect that the rate of loans rolling to delinquency will remain
Spread Outlook 22
constant throughout 2011. However, because of easing credit conditions, servicers will
likely be able to more quickly dispose of troubled loans, lowering the overall delinquency
rate. We believe that delinquencies are likely to peak at around 10% by late 2011.
 Deal Losses: Easing credit conditions will allow servicers to dispose of troubled
properties more quickly, causing an increase in losses. We expect deal-level losses to
approach the current level of appraisal reductions of around 3% by year end, but are
likely to increase significantly thereafter.
 Spreads: As fundamentals improve, investors are likely to become more confident in

their loss projections, causing super senior and AM spreads to continue tightening.
Spreads on older vintage AJ bonds are likely to improve, while spreads on recent
vintage AJ bonds and mezzanine tranches are likely to remain volatile and name-
specific. We expect AAA spreads on newly issued CMBS bonds to tighten inside 100 bp
over swaps.
 Recommended Positioning in the CMBS Market: Maintain a core long position in 10-
year super senior and AM CMBS bonds, as well as re-REMICS securitized by super
senior bonds. Remain selective in adding both current- and second-pay bonds and
bonds further down the capital structure.
Nomura Securities International Inc.

See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
Nomura | CMBS Special Topic 9 December 2010
Outlook for CRE Fundamentals and Prices

The recovery from the latest recession continues to be painfully slow. As we enter 2011, confidence
in the expansion’s durability remains intact, but growth is likely to be muted in the face of high
unemployment and heavy debt burdens. Both household and business spending will continue to
increase only gradually. Nomura economists forecast real GDP growth of 2.5% in 2011 and the
unemployment rate to remain elevated, at a level of 9.3% by the fourth quarter of 2011.
Because commercial real estate performance hinges on GDP and job growth, we also expect a slow
recovery across all property types. Within CMBS, the performance of the office and retail sectors
have an outsized effect, as each of these accounts for almost a third of the current outstanding
balance, versus the multifamily and hotel sectors that account for only 15% and 8% of the
outstanding balance, respectively. Office and retail properties tend to lag the overall economy, as
their lease terms generally extend for multiple years. The hotel and multifamily sectors, which have
much shorter lease terms, continue to report elevated delinquency levels, but are now beginning to
show signs of stabilization.
Improvements in delinquency rates will hinge on growth in net operating income (NOI), which
depends on both vacancy levels and rental rates. Across all four property types, vacancies increased
sharply in 2008, causing rental rates to drop and suppressing NOI. The pattern for occupancy rates
roughly follows the nation’s unemployment rates, and will likely improve only slowly during the next
year. A lack of new supply will help to increase occupancy levels in existing properties as the
economy begins to rebound, but because of the prior steep drop in occupancy levels, landlords will
not be able to push rents up significantly in the near term. Therefore, based on our projections for
only moderate growth in employment in 2011, NOI levels are likely to decrease moderately or remain
flat over the course of the year (Figure 1).
Figure 1: Historical and Projected year-over year NOI and RevPAR* Changes
YOY NOI & RevPAR Growth
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Office Retail Multifamily Hotel (RevPAR)
Commercial Real Estate Prices Should Stabilize Near Current Levels

Between late 2007 and late 2009, commercial property prices fell significantly, but have since
stabilized over the past year. According to Moody’s/REAL Commercial Property Price Index (CPPI),
prices are now 42.7% below their peak in October 2007, but the year-over-year change in September
2010 showed only a 0.3% drop (Figure 2). CoStar Group also reports a similar steep fall in property
prices from the fourth quarter of 2007 across the four major property types. For each quarter, CoStar
reports a rolling 12-month median sales price, producing a less volatile series. Since the fourth
quarter of 2007, office, retail, and hotel property prices per square foot dropped 35.0%, 35.2%, and
41.5% respectively, while multifamily prices per unit fell 26.2%. Property level prices are also now
showing signs of price stabilization. While a wave of distressed properties hitting the market in 2011
2
will likely suppress price appreciation, investor interest in stronger, cash-flowing assets will help
support prices, causing overall levels to stabilize near their current levels.
Figure 2: Commercial Property Prices

CoStar Group Sales Prices
Moody's/REAL CPPI
250 120
National Monthly Index
200
Price Per Sq. Foot

200 100
Price Per Unit

180
80
150
160 60
100
140 40
120 50 20
100 - -
80
Office Retail Hotel Multifamily (RHS)
Taking a closer look at office and retail property price performance across the four largest MSAs
within CMBS, we see that New York prices have shown the strongest recovery, with office property
prices now only 6.2% below their peak (Figure 3). Prices appear to be stabilizing or improving in all
four metros, with the exception of retail properties in Los Angeles, which fell another 3.3% in the third
quarter of 2010. Washington, D.C. office and retail prices are down 24.7% and 22.0% from their peak,
respectively. Chicago has underperformed, with office prices down 40.2% from the peak and retail
prices down 35.8%. As an additional indicator of the relative health of these four MSAs, Washington,
D.C and Los Angeles saw positive house price appreciation over the last year according to the Case-
Shiller index, while house prices in New York were flat. Of the four cities, only Chicago is
underperforming, with house prices falling 5.6% over the past year, versus the national average
decline of 1.5%.
Figure 3: Commercial Property Prices
Office Properties
Retail Properties
450 350
400
300
Price Per Sq. Foot
350
Price Per Sq. Foot
250
300
200
250
200 150
150
100
100
50
50
-
-
New York Los Angeles Washington, D.C. Chicago PPR Top 54 Cities
The pricing trends shown above are indicative of investor appetite for stabilized core properties
located in larger gateway cities. While the economy appears to be stabilizing, the uncertainty over the
last few years has caused a flight to quality, with property investors shunning non-core properties and
mid-tier cities. According to the Urban Land Institute’s 2011 Emerging Trends in Real Estate
3
publication1, investors’ top two investment choices are New York and Washington, D.C., followed by
San Francisco, Boston and Seattle. Los Angeles is also ranked among the top cities, while Chicago is
considered a ―fair‖ investment choice. Investors and lenders also seem to prefer properties located in
urban infill areas, as reflected in reported cap rates. According to the third quarter 2010 Korpacz
investor survey2, cap rates for suburban office properties averaged 8.40%, 39 basis points greater
than those located in central business districts. Across property sectors, investors seem to prefer
multifamily and industrial properties, believing that these are the only reliable cash-flowing assets,
while other sectors currently show strength primarily in Class A core properties located in dominant
markets.
As uncertainty regarding the strength of the economic recovery starts to wane and property
fundamentals begin to improve in 2011, we expect investors to extend their reach outside of trophy
properties in gateway cities. The revival of the CMBS new issuance market will be a key for the
commercial real estate market to regain solid footing. Since its inception, the CMBS market has
become a primary funding source for commercial real estate and currently provides approximately
20% of total debt capital. While insurance companies typically provide financing to top tier assets, the
CMBS market has historically targeted stabilized properties in secondary locations. With banks and
financial firms ramping up origination platforms, we believe that the CMBS market will be well-placed
to provide financing to the commercial real estate market in 2011.
Outlook for CMBS New Issuance in 2011

To estimate conduit new issuance for next year, we first estimate the value of securitized loans that
are likely to pay off in 2011. Using an estimated projection of refinance-ability based on in-place debt
yields and the percentage of 2010 loans that were able to refinance, we calculate that between 47%
and 60% of the $38bn due to mature in 2011 will be able to refinance. We then calculate the likely
size of a new loan by assuming that each loan is able to refinance with a 10% debt yield. This
produces a range of $29 to $33bn. If instead, we assume a 9% debt yield for new loans, the total
rises to $41bn.
In addition to supply from existing CMBS maturities, a portion of acquisition loans and other
maturing loans may choose to refinance using the CMBS market. According to the FDIC,
commercial banks are the largest holders of commercial real estate loans, holding $1.3tn of income-
producing real estate and accounting for 44% of the total. An additional $600bn is held by life
insurance companies, REITs, government agencies and others. Assuming that the majority of loans
have ten-year terms, 10% of this total should mature in 2011. If we assume that 5% is then
refinanced through CMBS, this could add approximately $10bn in conduit supply for CMBS new
issuance.
We also expect to see several single borrower transactions in 2011. Over the past year, $5.3bn in
single borrower transactions came to market. Already, the pipeline for single borrower deals is
growing. Over the past month, news of a $1.6bn Genesis Healthcare loan, a $1.5bn California office
building loan, and up to $15bn in GGP loans have been mentioned in the press. We estimate that
the single borrower market could easily reach $10bn next year, with a GGP transaction possibly
adding another $10bn.
In total, we project that CMBS issuance will likely reach $45bn in conduit deals (Figure 4), plus
another $10 to $20bn in single borrower transactions, roughly equivalent to the size of new issuance
in the late 1990s and early 2000s. Even with the uptick in new issuance, CMBS conduit outstanding
balance is likely to be flat or shrink slightly in 2011. Aside from the new issuance in 2010, the
outstanding balance for conduit CMBS deals decreased at an average rate of $4bn a month in the
past year. This rate is likely to increase in 2011 as commercial real estate credit becomes more
available and special servicers are more able to dispose of distressed properties. We estimate that
total conduit market size may drop by up to another $10bn over the course of 2011.
1
Jonathan D. Miller, ―2011 Emerging Trends in Real Estate,‖ Urban Land Institute and PricewaterhouseCoopers,October 2010.
2
Susan Smith, ed. ―Core Assets Stand Tall Among Investors,‖ PricewaterhouseCoopers, Third Quarter 2010
4
Figure 4: Conduit CMBS Issuance ($bn)
200
Conduit CMBS Issuance ($bn)
160
120
80
40
-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011
(proj.)
Although regulatory issues remain a concern for CMBS new issuance, we believe that the market
will be able to successfully navigate towards a solution. The securitization industry is now subject to
a maze of new regulations, from both the FDIC and the SEC, by way of the Dodd-Frank Act, which
are not totally aligned. One of the major concerns for originators is the implementation of risk
retention mandates. Generally, originators will be required to retain 5% of each deal they issue, but
the timing and the details of the new regulations remain unclear. Regulations under Dodd-Frank are
due to become effective two years after the date they are published, and require that regulators
consider the unique nature of CMBS, allowing the retention to be held by an originator, issuer, or
third-party investor, including the B-Piece Buyer. CMBS issuers, in particular, want to see the
flexibility in the provisions in the Dodd-Frank bill to be adopted. However, before the implementation
of Dodd-Frank, the FDIC’s more stringent rules will be in effect.
Also, originators would like to see the SEC’s Regulation AB disclosure and collateral-reporting rules
amended for CMBS. The CRE Finance Council (CREFC) is urging the SEC to consider both the
reporting guidelines already in place and the proposed enhancements to the Annex A and Investor
Reporting Package (IRP), contending that the current guidelines are more appropriate for the CMBS
investor. The SEC also proposes that privately issued deals be subject to the same reporting
requirements as publicly issued deals. This may increase the cost of funding for loans to borrowers
who may not be able to comply with Regulation AB.
While regulatory issues may delay the growth of CMBS new issuance, legislators and regulators
have consistently voiced support for the benefits of securitization. In addition, the unique nature of
CMBS collateral appears to be understood, and we expect that compromises and solutions that
benefit the investor, while not overburdening the issuer and originator, are likely to be reached.
Loan Maturity Risk in the CMBS Market

Although the majority of CMBS conduit loans mature between 2015 and 2017, balloon balances
increase steadily over the next two years. Almost $50bn in fixed rate CMBS loans were initially due to
mature in 2010, rising to $56 and $66bn for 2011 and 2012, respectively (Figure 5). For 2011
maturities, 20% have already defeased, and an additional 10% have been disposed. Accounting for
loans that have had their maturity dates extended, $38bn in fixed rate loans is now scheduled to
mature in 2011. An additional $28bn in floating rate large loan deals is currently outstanding, with
most of these loans reaching their final maturity dates within the next two years. For fixed-rate loans
that matured in 2010, we take a closer look at the relationship between debt yield and disposition and
consider the implications to maturity risk for the loans now scheduled to mature in 2011 and thereafter.
5
Figure 5: Conduit Loan Initial Maturities ($bn)
140
Conduit Loan Maturities ($bn)
120
100
80
60
40
20
-
2010 2011 2012 2013 2014 2015 2016 2017
Outstanding Disposed Defeased
Review of 2010 Conduit Loan Maturities
An average of $3bn of outstanding loans matured each month in 2010 (Figure 6). Overall, 71% of
outstanding loans that matured through the November remittance date have either defeased or paid
off. However, if we only consider loans that were outstanding within a year of their maturity date, then
the percentage of the loans that were able to pay off drops to 55%. Of the $14bn in loans that remain
outstanding, a third has received a maturity extension. Given that almost all of the outstanding non-
modified loans due to mature in 2010 have passed their maturity date, it is no surprise that the
majority are now delinquent. For those that have not received an extension, 65% are not performing.
Figure 6: 2010 Conduit Loan Maturities ($bn)
6
Conduit Loan Maturities ($bn)
-
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Outstanding Extended Defeased Disposed
Because appraisals have become less reliable during the recent credit crisis, the market has shifted
to the use of debt yields instead of cap rates. Debt yield, which measures net cash flow as a
percentage of the loan amount, provides a simple and clear measurement of balloon risk, as it is
highly correlated to a loan’s ability to refinance. Higher debt yields indicate lower levels of risk, with
lenders historically viewing a 12% debt yield as an attractive rate. Consistent with more conservative
underwriting, debt yields on A-Notes securitized in 2010 have been significantly higher, with over half
having debt yield in excess of 12%. In comparison, the 2005 vintage loans that matured in 2010 were
underwritten to less rigid standards. Approximately half were underwritten with an A-Note debt yield
between 8% and 10%, versus only 10% of loans securitized in 2010 being underwritten at these
relatively low debt yields. As the CMBS new issuance market begins to expand, we expect debt
yields on securitized loans to drift lower to around 9%.
6
Non-defeased loans that matured in 2010 showed a strong correlation between debt yield and ability
to pay at maturity (Figure 7). For loans with a debt yield of over 12%, almost three-quarters have
been disposed. This percentage drops to 40% for loans with debt yields under 10%. For loans that
have not reported updated financials, 70% remain outstanding. This is worse than the rate for loans
with debt yields under 8% and indicates that borrowers with weaker performance may be more
reluctant to submit updated financial reports to their lenders.
Figure 7: Debt Yields for Conduit Loans Maturing in 2010
100%
Debt Yields for 2010 Maturities
80%
60%
40%
20%
0%
Not Reported <6% 6-8% 8-10% 10-12% >=12%
Outstanding Paid in Full Disposed With a Loss
We also find that the percentage of loans that were disposed with a loss does not vary significantly by
debt yield. Overall, 6% of loans that matured in 2010 incurred a loss upon disposition. We do,
however, see a correlation between loss severity and debt yield. Loans with debt yield below 8% that
suffered a loss upon disposition reported a loss severity of 30%, while loans with debt yields over
12% suffered loss severities of only 12%. For loans that did not report updated financials, the loss
severity increases to 50%.
Unsurprisingly, loans with longer original terms have higher debt yields at maturity and are therefore
more likely to be able to refinance (Figure 8). The five-year loans that came due in 2010 had very little
time to appreciate before being hit by the credit crisis. In contrast, seven-year and ten-year loans
were originated in a more conservative environment and generally amortized for the length of their
loan term. In addition, these properties experienced several years of strong economic growth before
the start of the previous recession. Almost 60% of the ten-year loans that were due to mature in 2010
had debt yields over 12%. Five-year loans, which accounted for 57% of the maturing balance in 2010,
show a much weaker profile, with only 17% having a debt yield in excess of 12%.
Figure 8: Debt Yield Distribution for Conduit Loans Maturing in 2010, by Original Loan Term
100%
80%
60%
40%
20%
0%
5Y 7Y 10Y
Not Reported <8% 8-12% >=12%
7
Given the stronger profile for ten-year loans, it is no surprise that a larger percentage were able to
refinance (Figure 9). Overall, 73% of the ten-year loans maturing in 2010 have paid off, while only
59% and 44% of the seven-year and five-year loans, respectively, have been disposed. For the five-
year and ten-year loans, we see a high correlation between debt yield and the percentage that have
been disposed. While the correlation appears to break down for seven-year loans, we attribute this to
the smaller sample set, as seven-year loans accounted for only 10% of the overall maturing balance.
We also see that, while ten-year loans that have not reported updated financials paid at a rate of 60%,
this rate drops considerably for more recent vintages. Only 13% of five-year loans with no updated
financials were able to refinance.
Figure 9: Percentage of Disposed Loans Maturing in 2010 by Debt Yield and Loan Term
100%
Disposed 2010 Maturities
80%
60%
40%
20%
0%
5Y 7Y 10Y
Not Reported <8% 8-12% >=12%
Similar to the average spread at origination, exit debt yields also give insight into lender preference
for certain property types. Across the four major property types, multifamily and hotel loans maturing
in 2010 were more able to pay off than office and retail loans, indicating increased available capital for
these two sectors (Figure 10). The retail sector performed in line with the average, while the office
sector underperformed with only 49% of maturing loans able to pay off. Both FNMA and FHLMC offer
funding for multifamily properties, providing more liquidity within this sector and increasing the
likelihood that multifamily loans are able to refinance.
To compensate for additional risk, lenders have historically offered higher origination spreads on hotel
loans. However, both lenders and investors appear to believe that the hotel sector has reached a
bottom and are interested in allocating capital to this sector. According to data from PPR, hotels are
the only major property type now seeing solid RevPAR growth. While the hotel sector saw a higher
percentage of loans that were able to pay off, almost a fifth of loans by balance that paid off also
suffered a loss. Although hotels saw higher delinquency rates during the course of 2010, special
servicers and owners were able to dispose of or refinance even these distressed properties,
indicating increased lender and investor demand for hotels near the bottom of the cycle.
8
Figure 10: Percentage of Disposed Loans Maturing in 2010 by Debt Yield and Property Type
100%
80%
60%
40%
20%
0%
Office Retail Multifamily Hotel
Not Reported <8% 8-12% >=12%
Looking at the 15 MSAs with the highest volume of maturing loans in 2010, we see that highly levered
loans in New York, Washington, Los Angeles, San Francisco, and Chicago were more likely to pay in
full (Figure 11). For each of these five cities, over half of the loans with debt yield under 8% were
disposed. We partially attribute this to the availability of international financing, with gateway cities
3
attracting increased levels of investor interest. According to a recent Urban Land Institute survey ,
Washington, D.C. and New York were investors’ top choices for commercial real estate properties,
followed by San Francisco, Boston, and Seattle. Among large metropolitan areas, Los Angeles also
th
ranks near the top, at number nine. We are surprised by Chicago’s resilience, as the city ranks 19 in
the survey, which seems to indicate that investors view this city as a less appealing choice.
Figure 11: Percentage of Disposed Loans Maturing in 2010 by Debt Yield
100%
80%
60%
40%
20%
0%
<8% 8-12% >=12%
Outlook for Conduit Loans Maturing in 2011
The $38bn in outstanding loans currently scheduled to mature in 2011 show a slightly weaker debt
yield profile than those that matured (or were scheduled to mature) in 2010 (Figure 12). Overall, 49%
of the 2011 maturities have a debt yield over 10%, versus 53% for the 2010 maturities. A larger
percentage of the 2011 maturities are highly levered, with 32% either not reporting updated financials
or having a debt yield under 8%. This represents a 4% increase from the loans maturing in 2010.
3
Jonathan D. Miller, ―2011 Emerging Trends in Real Estate,‖ Urban Land Institute and PricewaterhouseCoopers October 2010.
9
Figure 12: Debt Yields for 2010 and 2011 Conduit Maturities
40%
Debt Yield Distribution
30%
20%
10%
0%
Not Reported <6% 6-8% 8-10% 10-12% >=12%
2011 2010
We partially attribute this weaker debt profile to progressively weaker underwriting standards, starting
in 2005. While five-year loans accounted for 57% of the 2010 maturities, this percentage drops to
41% for the 2011 maturities. However, the percentage of over levered five-year loans jumps
considerably between 2010 and 2011 maturities. For five-year loans maturing in 2010, 24% had debt
yields under 8%, increasing to 40% for five-year loans maturing in 2011 (Figure 13).
Figure 13: Debt Yields for 2011 Conduit Maturities by Original Term ($bn)
16
14
12
10
8
6
4
2
-
5Y 7Y 10Y
Not Reported <8% 8-12% >=12%
While loans on office and retail properties account for two-thirds of the 2011 maturities, highly levered
loans are concentrated in the multifamily sector (Figure 14). Almost $4bn in multifamily loans with
either no updated financials or debt yield under 8% is due to mature in 2011. Historically, this sector
has relied heavily on financing provided by FNMA and FHLMC, and the success rate for these loans
will depend on their continued support for this market. Additionally, due to the continued weakness in
the single family housing market, property investors now view multifamily properties as an attractive
choice.
Among the four major property types, hotels have the highest percentage of highly levered loans, with
almost half reporting a debt yield under 8%. Because hotels and multifamily properties have the
shortest lease terms, they have come under more stress during the recent downturn, and it is no
surprise that their latest reported cash flows have weakened. However, due to the short lease terms,
these two property types have been the first to reflect a strengthening economy. Hotels are reporting
increased RevPAR, and multifamily properties are expected to see gains in NOI by the end of 2011,
which may make investors more inclined to provide the equity necessary for these loans to refinance.
10
Figure 14: Debt Yields for 2011 Conduit Maturities by Property Type ($bn)
14
12
10
-
Not Reported <8% 8-12% >=12%
The MSA distribution for the 2011 maturities is more heavily weighted to secondary and tertiary
markets (Figure 15). Although the five heaviest concentrations remain unchanged between the 2010
and 2011 maturities, the percentage of highly levered loans located outside of these five cities
increases. For the 2011 maturities, 18% of maturing loans are located outside the five largest
metropolitan areas and have debt yield under 8%, increasing from 12% for the 2010 maturities.
Currently, weak investor demand for properties outside of major metropolitan areas has caused the
range of cap rates to widen significantly. According to CoStar, cap rates for office properties
averaged 8.3% in the third quarter of 2010. This rate drops to 6.3% and 7.5% for New York and
Washington, D.C. and soars to 10.0% and 10.1% for Atlanta and Houston. Therefore, it is likely that
loans located in secondary and tertiary properties will have more difficulty refinancing and would
benefit from a stronger debt yield profile.
Figure 15: Debt Yields for 2011 Conduit Maturities by MSA ($bn)
3.0
Debt Yields for 2011 Maturities ($bn)
2.5
2.0
1.5
1.0
0.5
0.0
Not Reported <8% 8-12% >=12%
Unlike the 2010 maturities, the pipeline for the $38bn maturing in 2011 is more heavily weighted
toward year-end (Figure 16), giving time for credit conditions to ease further. For 2011, CMBS
monthly financing needs average $2.5bn in the first quarter, increasing to $2.8bn in the second
quarter. Over $2bn was disposed in both June and July 2010. Therefore, with easing credit conditions
and a growing CMBS new issuance market, we believe there is likely sufficient capacity to refinance
the pipeline of maturing deals. Further, the delayed maturity schedule for 2011 may increase the
likelihood that loans maturing later in the year are able to refinance, as this gives more time for the
overall economy to heal and for the CMBS engine to kick into gear.
11
Figure 16: 2011 Conduit loan maturities ($bn)
7
2011 Loan Maturities ($bn)
-
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Outstanding Disposed Defeased
While the loans maturing in 2011 exhibit a weaker profile than those maturing in 2010, we believe
that a stronger economy and an increased availability of credit will offset some of these concerns.
For our stress case, we apply the 2010 disposal rates to the 2011 debt yield buckets, and find that
only 47% of loans due to mature next year will be able to refinance, down from 55% in 2010.
However, the CMBS market has historically targeted loans with a debt yield in the 8% to 10% range,
and with new issuance steadily increasing, we believe that higher levered loans are more likely to be
able to refinance in 2011. In addition, increased use of modifications will likely grants extensions on
loans with positive cash flow. In our base case, we increase the refinance probability for loans with
debt yield over 8%, resulting in approximately 60% of loans being able to pay off at maturity in 2011.
Conduit Loan Maturities Beyond 2011
Although we expect the majority of the loans maturing in 2011 to refinance, we have concerns about
the 2012 maturities. Currently, $55bn conduit loans are scheduled to mature in 2012, and almost two
thirds of this balance consists of loans with five and seven year terms (Figure 17). These loans were
underwritten near the peak of the market and suffer from both more aggressive underwriting and a
weaker economic environment. Currently, 38% of loans maturing in 2012 have debt yield under 8%.
NOI is not likely to grow until 2012 for the office and retail sectors, indicating that the financial
conditions of these loans are not likely to improve before they reach their maturity date.
While those maturing in 2012 are not likely to see significant NOI growth, fewer loans mature in 2013
and 2014, and these show a much stronger debt profile. As the economy stabilizes and improves
over the next few years, we expect that debt yields on outstanding loans will increase. However, the
CMBS market will require a stronger economy and a much larger new issuance platform over the
next few years for the wave of maturities in 2016 and 2017 to be able to successfully refinance.
12
Figure 17: Conduit Loan Maturities in 2011 and Beyond ($bn)
160 160
140 140
Loan Maturities ($bn)
Loan Maturities ($bn)

120 120
100 100
80 80
60 60
40 40
20 20
- -
2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017
Not Reported <8% 8-12% >=12% 5 Year 7 Year 10 Year
Outlook for Loan Modifications in the CMBS Market

Over the past two years, the CMBS market has seen a surge in modifications. In September 2009,
the U.S. Treasury Department announced adjustments to REMIC tax laws that removed certain
obstacles to loan modifications. These changes gave servicers more options and flexibility in
amending loan terms and also allow modifications to loans that are not in imminent risk of default. As
a result, the CMBS market has seen an increase in both the number and type of loan modifications.
Through November remittances, Trepp reports that over 400 loans have been modified this year, up
from 371 in 2009 and up from a historical average of less than 50 per year. Additionally, the average
balance of modified loans has increased from $17 million in 2008 to $25 million during the last two
years, resulting in a large increase in the total balance of modified loans (Figure 18). While the pace
of modifications has slowed over the past two months, we expect the rate to increase significantly,
given the pipeline of maturing loans on the horizon. Although capturing the full set of modification
data remains a challenge, the information we are able to glean from Trepp and servicer files allows us
to gauge the initial success rate for modifications to date.
Figure 18: Conduit Loan Modifications ($bn)
7 100
Loan Modifications (Count)
Loan Modifications ($bn)
6
80
5
4 60
3 40
2
20
1
- 0
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Balance ($bn) Count (RHS)
13
Types of Modifications
When a servicer chooses to modify a loan, it seems to take approximately nine months from the time
of transfer to special servicing to completion of the modification. This permits ample time for the
servicer to evaluate the appropriate terms of the modifications. In general, servicers tend to modify
loans that are only moderately distressed, while opting to foreclose or sell deeply underwater loans.
For a modification to be successful, the borrower must be willing to work with the servicer and to
continue supporting the property throughout the lengthy modification process.
Often, servicers require borrowers to contribute significant hard cash to the loan in the form of
working capital, rollover, or debt service reserves as part of the modification agreement, reducing the
likelihood that deeply distressed properties will qualify for a modification. According to servicer
comments, the amount of cash infusion can reach a sizeable percentage of the outstanding loan
balance, and without a cash infusion, the servicer may deny a request for a modification. As an
example, the servicer denied a modification to the sponsor of the $261.6 million Citadel Mall and
Northwest Arkansas Mall Portfolio loan in CD 2007-CD4 because the sponsor refused to commit
additional capital to the loan. The borrower now appears to be defaulting on the loan. Therefore, in
general, borrowers that receive modifications believe that their properties are likely to recover and are
willing to add capital in order to receive the necessary modification. As an additional indication of this
trend, 75% of loans modified within the last two years have a recently reported NCF DSCR of over
0.9x. As a result of this selection bias, the re-default percentage and loss severities for modified
CMBS loans remain very low.
One issue facing CMBS investors is determining the terms of the modification. The Investor Reporting
Package (IRP) contains a Historical Modification Report that can be used to record the new loan
terms. While the framework of this report is very complete, it may omit certain modified loans entirely
and is incomplete for others. This report allows a servicer to classify the modification into one of
several types. However, we find that the classification code that is entered is often incorrect even for
the simplest modifications. Further, modifications generally combine several of the modification types,
causing most loans to be classified as ―Combinations‖ or ―Other‖ types.
Figure 19: Servicer-Reported Modification Types
Extension
Amort. Change
Principal Writeoff
Rate Reduction
Other / Not Reported
Combination
Overall, 36% of modifications are classified as Maturity Date extensions, while 42% are classified as
either ―Combinations‖ or ―Other‖ types (Figure 19). The three largest special servicers report that their
modifications are overwhelmingly maturity date extensions (Figure 20). LNR, CWCapital, and C-III
are special servicers for almost 70% of the outstanding conduit universe and report that between 43%
and 52% of their modifications consist of extensions. Midland, accounting for an additional 10% of the
servicing within the conduit universe, reports over two-thirds of their modifications as either
―Combinations‖ or ―Other types‖.
14
Figure 20: Modification Types by Servicer
60%
50%
Modification Type
40%
30%
20%
10%
0%
LNR CWCapital C-III Midland
Extension Amort. Change Other / Not Reported Combination
Performance and Characteristics of Recently Modified Loans
Although most modifications have seasoned for less than a year, we can assess the initial progress
by taking a look at the current status of these loans. Of the $19bn of loans modified since the
beginning of 2009, 86% are now current. These performing modified loans account for 2.7% of the
outstanding CMBS conduit balance, and they would have likely contributed to the total delinquency
rate had they not received a modification. Of the $10bn in loan balance modified in 2009, only 10%
was not performing six months after modification (Figure 21). This compares favorably with loans that
entered special servicing in 2009, as 60% of these loans were not performing six months after
transfer. However, the performance of CMBS loans modified in 2009 has degraded over time.
Currently, 14% of these loans are not performing, up from 10% six months after modification, with a
higher percentage now in foreclosure or REO. For 2010 modifications, the weighted average time
since modification for these loans is just over six months. Therefore, it is no surprise that their current
status is comparable to the 2009 modified loans six months after modification.
We also see that the percentage of 2009 modified loans that has been disposed increases
significantly over time, from 1% six months after modification to 4% currently. To date, 2.5% of the
2010 maturities have been disposed. This increase is likely the result of easing credit conditions, with
more maturing loans now able to refinance.
Figure 21: Status of Modified Loans (six months after modification and current)
2009 Modified Loans 2010 Modified Loans
100% 100%
96% 96%
Delinquency Status
Delinquency Status
92% 92%
88% 88%
84% 84%
80% 80%
6 months post mod. Current Current
Performing Delinquent FC/REO Disposed
15
To date, loss severity for recently modified loans has been very low. Although we expect the severity
rate to increase as more loans are disposed, it is likely to remain below the conduit average due to
the positive selection bias for loans that receive modifications. For loans that were modified and have
been disposed with a loss since the beginning of 2009, the severity is 23%, compared with the
conduit universe average loss of 39%. Just under a fifth of these loans have suffered losses over 3%.
The average appraisal reduction for modified loans is 30%, indicating that losses on these loans is
likely to be much higher than the current rate of 23%, but severity is likely to remain below the conduit
average.
Contributing to lower loss severity, the majority of modifications have been targeted to loans with
larger outstanding balances. Because certain disposition costs are fixed, severity rates tend to be
higher for loans with lower balances. Also, larger loans tend to have more sophisticated borrowers
that may be more willing and able to continue supporting the loan by contributing additional funds to
the project. For loans that have been disposed with a loss over the last two years, loans with
balances under $10 million have an average severity of 48%, compared with 33% for loans with
balance over $25 million.
The balance distribution for modified loans is heavily skewed towards larger loans. Loans with
balance of over $100 million account for approximately a quarter of the conduit universe, while 43%
of the loans modified over the last two years have balance over $100 million (Figure 22). Likewise,
the percentage of modified loans with balance under $10 million remains much lower than the conduit
average of 33%. In addition to larger loans generally having more sophisticated borrowers, this trend
may also indicate that servicers believe there is little to be gained from modifying smaller loans.
Figure 22: Conduit Loan Modification Distribution by Loan Size
100%
Loan Size Distribution
80%
60%
40%
20%
0%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
<$10m $10-$25m $25-$50m $50-$100m >=$100m
Also contributing to the lower loss severity is the percentage of performing loans that faced difficulty
refinancing during the credit crisis. Excluding the GGP modifications, 37% of modified loans received
their first modification within six months of maturity. For non-defeased loans that were scheduled to
mature in 2010, approximately 16% received a modification in the last two years. Almost all of these
modifications involved a maturity date extension, with a median length of 12 months. Although very
few of these have resolved, we expect loss severities for loans that only require extensions to remain
very low, as the increased availability of credit will allow these loans to refinance and pay in full.
Taking a look at the vintage distribution (Figure 23), the percentage of modifications performed on
loans from the 2007 vintage has been steadily increasing, from less than 10% in the first half of 2009
to 35% in the previous quarter. In 2010, loans from the 2005 and 2006 vintages have contributed to
20%-30% of the modified total, while the percentage of loans from older vintages has fallen to under
20%. Over the next year, we expect fewer modifications from the 2005 vintage and an increase in
modifications for loans from the 2006 and 2007 vintages, as maturity risk for five-year loans
transitions from the 2005 vintage to later years.
16
Figure 23: Conduit Loan Modification Distribution by Vintage
100%
Vintage Distribution
80%
60%
40%
20%
0%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
pre-2005 2005 2006 2007 2008
Property type does not appear to be a major factor in determining the likelihood of a modification
(Figure 24). Aside from the GGP loans, the distribution of modified loans is very similar to the
distribution of delinquent loans, with property type contributions to each differing by only a few
percentage points. The multifamily sector (including manufactured housing and cooperatives) and the
hotel sector are underperforming the universe, as both are more heavily represented in the sets of
delinquent loans and modified loans. Given that both property types are characterized by shorter
lease terms, their cash flows are likely to react more quickly to broader economic conditions. It is
therefore no surprise that these two property types have been more likely to experience stress over
the last two years.
Figure 24: Property Type Distribution (Modified loan set excludes GGP loans)
35%
30%
Property Type Distribution
25%
20%
15%
10%
5%
0%
Office Retail Multifamily Hotel Other
Modified Loans Delinquent Loans Conduit Universe
Loans located in areas projected to see positive rent growth are more likely to be modified. We take a
closer look at the distribution of delinquent and modified loans on properties within the 15 MSAs most
heavily represented within the conduit universe (Figure 25). Loans on properties located in
Washington, D.C., Dallas, San Francisco, and Seattle have had a higher propensity to be modified,
as these cities are more heavily represented in the set of modified loans than they are within the set
of delinquent loans. According to PPR, these four cities are all expected to see positive rent growth in
2011 for the office, hotel, and multifamily sectors. Washington, D.C. and Seattle are both expected to
see rent growth over 2% across all three property types. Similarly, delinquent loans on properties
located in Los Angeles, Chicago, and Philadelphia have not been as likely to receive modifications.
PPR projects negative rent growth in the office sector next year for all three cities and sharp declines
in multifamily rents in Chicago and Los Angeles.
17
Figure 25: MSA Distribution (Modified loan set excludes GGP loans)
14%
12%
MSA Distribution
10%
8%
6%
4%
2%
0%
Modified Loans Delinquent Loans Conduit Universe
Over the course of 2011, we expect that servicers will continue to modify loans at a rate of
approximately $1bn per month. With the heavy pipeline of loans maturing, servicers will likely
continue to extend maturity dates for loans with solid cash flows. Additionally, because NOI growth is
projected to be muted in 2011, servicers will likely provide assistance to strong borrowers who may
face short-term issues. Investors in shorter duration tranches may see their principal windows
lengthen as loans initially scheduled to pay down their tranche are extended, while investors further
down the capital structure will benefit from the postponement and moderation of eventual losses.
Outlook for CMBS Collateral Performance
Delinquency Rates in the CMBS Market
During the course of 2010, delinquency rates within the 1998-2008 vintages of the CMBS universe
increased over 50%, rising from 6.2% of the current balance to 9.6% in November 2010 (Figure 26).
In addition to a steady stream of new delinquencies, servicers were unable to quickly dispose of
troubled loans due to tight credit conditions. While the balance of 30-day and 60-day delinquent loans
changed very little over the course of the year, the volume of loans that were real estate owned more
than doubled, rising from $3.3bn at the beginning of the year to $8.3bn in November 2010.
10%
8%
Delinquency Rate
6%
4%
2%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
FC / REO 90+ Day / Non- Perf Matured 60 Day 30 Day
18
Looking at the four primary property types within CMBS, we see that hotels and multifamily properties
underperformed the overall universe (Figure 27). Because both of these property types are
characterized by shorter lease terms, they were more quickly affected by the downturn in the
economy, and as the economy improves, they are the first to see positive growth in NOI. Although
office properties started the year with a delinquency rate 150 bp less than retail properties, the
difference between the two is now negligible. Office delinquency rates are likely to surpass retail
delinquencies within the next year, as office properties continue to lag the economic recovery.
20%
16%
Delinquency Rate
12%
8%
4%
0%
As we look at delinquency rates by vintage, we see the effects of more aggressive underwriting for
the 2007 and 2008 vintages (Figure 28). Delinquency rates for the 2007 vintage continue to increase,
surpassing 12% in November 2010. We also see the effects of maturity defaults within the 2005
vintage. At the beginning of the year, the delinquency rate for the 2005 vintage tracked that of more
seasoned vintages. However, by year end, the delinquency rate had increased by 400 bp, outpacing
even the more aggressively underwritten 2006 vintage. We expect the delinquency rate for the 2005
vintage to stabilize and decrease over the next year, as maturity risk shifts to the 2006 vintage. Just
over a quarter of the loans from the 2005 vintage that matured in 2010 became delinquent near their
maturity date. Although economic conditions are likely to improve over the next year, loans from the
2006 vintage that are scheduled to mature next year show a weaker credit profile. If we assume that
a third of these loans become delinquent, the 2006 vintage delinquency rate is likely to increase by
2.5% and contribute 1.9% to the overall conduit universe delinquency rate.
Figure 28: CMBS Delinquency Rates by Vintage
14%
12%
Delinquency Rate
10%
8%
6%
4%
2%
0%
pre-2005 2005 2006 2007 2008
19
Throughout 2010, the rate at which new loans rolled to delinquency outpaced the overall cure rate
(Figure 29). Over the year, loans became newly delinquent at an average rate of 0.83% of
outstanding balance each month. Overall, the resolution rate for delinquent loans averaged 0.53%
per month, with 0.40% curing and 0.13% paying off. As credit conditions have improved, the rate at
which special servicers have been able to dispose of troubled loans has increased. The monthly
average disposal rate for 2009 was only 0.03%, which has increased to 0.17% in the second half of
2010.
Figure 29: CMBS Delinquency Roll Rates

1.4%
1.2%
Delinquency Roll Rate
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Dlq->Curr Dlq->Disposed Curr-> Dlq
To project delinquency rates for 2011, we focus on the 2005 – 2007 vintages, as these three vintages
account for almost three-quarters of the total outstanding balance. We assume that maturity defaults
transition from the 2005 to the 2006 vintage, while roll rates for term defaults remain unchanged. NOI
growth is projected to be flat in 2011 for retail and multifamily properties, while hotels are likely to see
sharp improvement. Although NOI for office properties is projected to decline, borrowers may be
more willing to continue supporting underwater properties as the overall economy continues to
improve. These assumptions produce a monthly roll rate to delinquency of 0.78%, in line with the
average roll rate from the previous six months. As servicers are able to resolve more loans, either
through modification or disposition, we believe that the percentage of delinquent loans that are either
disposed or brought current each month is likely to increase, but will remain shy of the 0.78%
threshold required to reduce the overall delinquency rate. In summary, we believe that the total
delinquency rate is likely to peak just below 10% in the second half of 2011.
Loss Severity and CMBS Deal Losses

Over the last year, the rate at which special servicers are able to dispose of troubled loans has
increased substantially. Monthly dispositions of delinquent loans averaged $116mnfor the first half of
2009, while recently, over $1bn has been disposed each month. In addition, recent levels of loss
severity appear to be trending down towards the average long term rate of 39%. For instance, the
average loss severity for loans that are disposed with a loss in November 2010 was 39.1%, down
considerably from the high of 55.2% in October 2010 (Figure 30).
A sizeable portion of the disposed loans are liquidated with loss severity less than 2%. For instance,
the largest disposed loan with a loss reported in the November remittance was the $81mn Hilton
Times Square loan in GECMC 2005-C4. The loan was recently refinanced with a $92.5mn loan, but
the Trust recorded a loss of $680,476. This loan had been specially serviced for some time, and the
0.8% loss is likely due to servicer fees. Excluding loans with minimal losses causes the loss severity
to increase significantly and reduces the volatility in the series. We also see this series dipping below
60%, with the average three-month loss severity at 53.4% for November.
20
Figure 30: CMBS Conduit Disposed Amount and three-month Average Loss Severity
100% 1.6
1.4
Disposed Amount ($$bn)

80%
1.2
Loss Severity
60% 1.0
0.8
40% 0.6
0.4
20%
0.2
0% 0.0
Disposed Amount (RHS) Loss Severity Loss Severity (Loss > 2%)
As the rate of dispositions increases, we expect that loss severities would also drop, as loss rates
increase significantly when the length of time spent in special servicing lengthens. While increased
servicer fees account for a portion of the increased loss severity, it is also likely that more severely
distressed properties are more difficult for special servicers to dispose of. For loans that are disposed
within six months of default, loss severity averages only 24%. For loans that remain in special
servicing over two years, severity increases to 77%.
Although the disposition rate has increased substantially over the last year, it is barely keeping pace
with the increase in loans in foreclosure or REO. On average, the balance of loans in foreclosure or
REO has grown by just over a billion each month in 2010 and now exceeds $26bn. With times to
resolution doubling to approximately two years, the pace of liquidations and corresponding losses to
CMBS deals has been very slow. For loans that defaulted in 2008, almost half remain outstanding,
increasing to over three-quarters for loans that defaulted in 2009. While the dispersion of losses in the
conduit universe is large, overall deal level losses average around 1% (Figure 31).
However, as a result of the increase in the delinquency rate, we see an increase in the percentage of
loans that have taken an appraisal reduction. Any interest shortfalls to the trust associated with the
appraisal reductions are absorbed by the tranches starting with those at the bottom of the cash flow
structure and are recorded as appraisal subordinate entitlement reductions (ASERs). While appraisal
reductions account for the majority of interest shortfalls, ASERs can also occur when servicers pass
the cost of various fees to the trust. Currently, 72% of delinquent loans have received an appraisal
reduction, with the average appraisal reduction amount equal to 30% of the outstanding balance.
Within the 2005-2008 vintages, the average deal has seen appraisal reductions of 3.0% of the
original balance. However, as can be seen in Figure 31, the dispersion of deal-level losses and
appraisal reduction amounts is quite large, with maximum losses reaching 3.5% and maximum
appraisal reduction amounts reaching 19.9%.
21
Figure 31: Loss Distribution, as a Percentage of Original Balance
20%
Pct of Original Deal Balance
15%
10%
5%
0%
2005 2006 2007 2008
Cumulative Loss Loan Appraisal Reduction Max C/E with ASER
As credit conditions continue to ease, we anticipate that special servicers will be able to more quickly
resolve delinquent loans. This process is likely to cause the overall deal-level losses to approach the
appraisal reduction percentages. We project overall deal losses to increase to approximately 3% by
the end of 2011. We also expect to see wide dispersion in deal level losses, with certain deals
continuing to perform very well, while others see losses creeping into the portion of the debt stack
that was originally investment grade.
Outlook for CMBS Spreads and Recommended Positioning

Commercial property fundamentals should stabilize and begin showing signs of improvement as we
progress through 2011, attracting investors to broaden their sights to cash flowing properties in
secondary markets. Additional capital flowing into the market should improve the outlook for loans
that are maturing in 2011, reducing the rate of new delinquencies and supplying new loans for the
budding CMBS new issuance market. However, deal level losses are likely to increase significantly as
servicers are able to dispose of more troubled assets. This combination of improving fundamentals
and increased losses will cause a further bifurcation within CMBS deals, with 20% and 30%
enhanced tranches continuing to tighten, and mezzanine tranches likely to receive their final
payments.
Over the past two years, spreads on super senior, AM, and AJ bonds have tightened considerably
across the board and have become a lot less volatile (Figure 32). As commercial real estate
fundamentals stabilize and investors become more confident in projected CMBS loss rates, we
expect longer dated CMBS bond spreads to continue to ratchet in, with super senior spreads
tightening in below 200 bp over swaps. While a large new issue pipeline may further limit tightening to
some extent, we believe that investors hungry for longer-dated yield product will increase their
allocations to CMBS in 2011.
22
Figure 32: Recent History of CMBS Spreads over Swaps, for tranches originally rated AAA
4000
CMBS Spreads over Swaps
3500
3000
2500
2000
1500
1000
500
0
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Super Senior AM AJ
The spread between 2005 AJ paper, AM paper, and super senior paper is likely to contract across the
board. However, outside of the 30% and 20% enhanced space, CMBS pricing is likely to be highly
bond specific. While older vintage AJ bond spreads are likely to improve since deal loss rates are
likely to remain well below AJ credit enhancement, investors in 2007 AJs and mezzanine paper will
need to monitor deal-specific losses and interest shortfalls. ASERs are beginning to creep above 10%
and are likely to continue to rise, cutting off interest distributions to more bonds higher in the capital
structure. Shorter dated paper, which is subject to increased prepayment risk as liquidations increase,
is likely to trade closer to par. On the new issue front, we believe AAA spreads are likely to move well
inside swaps plus 100 bp.
Risks to our forecast lie primarily within the broader economy, but regulatory changes may have
unforeseen consequences. Any delays to employment and GDP growth are likely to cause further
delays in NOI growth for commercial real estate properties, resulting in an increase in new
delinquencies. Further, negative international headlines have the potential for disrupting any nascent
recovery in the United States. While we believe that securitization and CMBS is likely to survive the
current round of regulatory reform, the possibility for missteps still remains.
We recommend buying 2005 through 2007 vintage longer dated super senior and AM bonds, as well
as re-REMICS securitizing super seniors and AMs. With credit enhancement of 20% or more, we
believe these bonds are likely safe from any potential downturn. We also recommend investors
carefully select AJ exposure, with earlier vintage AJs likely to outperform. Within the short cash flow
bonds, we recommend that investors focus on amortizing classes that are more structurally protected
from prepayment risk. We expect newly issued CMBS deals to contain better underwritten loans and
have additional features to promote transparency and investor protection. We recommend buying
new issue conduit deals and specific single borrower deals as investor guidelines permit.
23
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CMBS Special Topic: Outlook For The CMBS Market in 2011

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CMBS Special Topic

Securitized Products Research | Americas

Outlook for the CMBS Market in 2011 09 DECEMBER 2010

Key Themes in the CMBS Market

 Spreads: As fundamentals improve, investors are likely to become more confident in

Nomura Securities International Inc.

Outlook for CRE Fundamentals and Prices

Office Retail Multifamily Hotel (RevPAR)

Commercial Real Estate Prices Should Stabilize Near Current Levels

Figure 2: Commercial Property Prices

Price Per Sq. Foot

Price Per Unit

Office Retail Hotel Multifamily (RHS)

Figure 3: Commercial Property Prices

Outlook for CMBS New Issuance in 2011

Figure 4: Conduit CMBS Issuance ($bn)

Loan Maturity Risk in the CMBS Market

Figure 5: Conduit Loan Initial Maturities ($bn)

Outstanding Disposed Defeased

Review of 2010 Conduit Loan Maturities

Figure 6: 2010 Conduit Loan Maturities ($bn)

Outstanding Extended Defeased Disposed

Figure 7: Debt Yields for Conduit Loans Maturing in 2010

Outstanding Paid in Full Disposed With a Loss

Not Reported <8% 8-12% >=12%

Not Reported <8% 8-12% >=12%

Not Reported <8% 8-12% >=12%

Figure 11: Percentage of Disposed Loans Maturing in 2010 by Debt Yield

<8% 8-12% >=12%

Outlook for Conduit Loans Maturing in 2011

Not Reported <8% 8-12% >=12%

Not Reported <8% 8-12% >=12%

Not Reported <8% 8-12% >=12%

Figure 16: 2011 Conduit loan maturities ($bn)

Outstanding Disposed Defeased

Conduit Loan Maturities Beyond 2011

Figure 17: Conduit Loan Maturities in 2011 and Beyond ($bn)

Loan Maturities ($bn)

Not Reported <8% 8-12% >=12% 5 Year 7 Year 10 Year

Outlook for Loan Modifications in the CMBS Market

Figure 18: Conduit Loan Modifications ($bn)

Balance ($bn) Count (RHS)

Figure 19: Servicer-Reported Modification Types

Figure 20: Modification Types by Servicer

Extension Amort. Change Other / Not Reported Combination

Performance and Characteristics of Recently Modified Loans

2009 Modified Loans 2010 Modified Loans

Performing Delinquent FC/REO Disposed

Figure 22: Conduit Loan Modification Distribution by Loan Size

<$10m $10-$25m $25-$50m $50-$100m >=$100m

Figure 23: Conduit Loan Modification Distribution by Vintage

pre-2005 2005 2006 2007 2008

Modified Loans Delinquent Loans Conduit Universe

Modified Loans Delinquent Loans Conduit Universe

Outlook for CMBS Collateral Performance

Delinquency Rates in the CMBS Market

FC / REO 90+ Day / Non- Perf Matured 60 Day 30 Day

Office Retail Multifamily Hotel

Figure 28: CMBS Delinquency Rates by Vintage

pre-2005 2005 2006 2007 2008

Figure 29: CMBS Delinquency Roll Rates

Dlq->Curr Dlq->Disposed Curr-> Dlq