Starwood’s Move into Special Servicing Amid Distress Level’s Continued Drop

There were several motivations for the just-announced $1.05 billion purchase of LNR Property by Starwood Property Trust and Starwood Capital Group. The one that seems to have gotten the most attention, though, was the opportunity the acquisition gives Starwood to move into special servicing.

RCA’s Dan Fasulo

There were several major motivations for the just-announced $1.05 billion purchase of LNR Property by Starwood Property Trust and Starwood Capital Group. The one that seems to have gotten the most attention, though, was the opportunity the acquisition gives Starwood to move into special servicing. LNR’s U.S. Special Servicer is the nation’s largest such entity, with more than $131 billion in loans under management and REO.

But it might not be out of place to question whether this is the ideal time to move into special servicing. A recent 2012-in-review report on U.S. capital trends by Real Capital Analytics highlights several trends that, while good news for most, suggest that special servicing has peaked in the current cycle.

“The current level of prices, now within 20 percent of peak,” the report states, “is critical given the many loans made at the peak with loan-to-values of 75 percent–80 percent. Although refinancing these loans is still problematic, most are now being resolved simply through assets sales.”

The RCA report goes on to note that new instances of distress fell substantially in the fourth quarter, when they totaled $4.0 billion, the lowest level this cycle. Inflows to distress in all of 2012 totaled $38.8 billion, down from $64 billion the previous year.

Further, according to Amherst Securities, payoffs of maturing CMBS loans in the fourth quarter spiked to 80 percent. By comparison, that percentage had been as low as the low 30 percent range in the first quarter of 2010 and has hovered around roughly 50 percent from early 2009 to mid-2012.

Of the $394.0 billion in commercial mortgages becoming troubled over the past cycle, according to RCA, 58 percent has now been resolved, with $164 billion remaining to be worked out.

In addition, the report states, workouts of troubled loans also slowed in 2012, totaling $58 billion, versus $65.6 billion in 2011. Distressed property sales dropped to 9 percent of all volume in 2012 (and only 5 percent in the fourth quarter), from 13 percent in 2011.

As the stealth recovery continues to chug forward and CRE markets improve, RCA managing director Dan Fasulo told Commercial Property Executive, some troubled properties are likely to be OK. “That equity gap keeps getting smaller and smaller,” he said, especially in larger markets.

One thing that raises Fasulo’s eyebrows a bit about the Starwood/LNR deal is that it wasn’t all that long ago that the current owners bought LNR — and now they’re selling.

“At first glance, there are some obvious synergies in these tie-ups, but it’s going to depend on execution,” Fasulo said. Still, he added, LNR is “a good business by itself.”

He definitely likes what Starwood’s announcement called the expanded “pipeline opportunities” the acquisition will bring. With access to deal flow so challenging these days, Fasulo said, “It’s gotten very competitive out there,” so much so that sometimes it feels like 2006–07.

And even any doubts about the importance of the special-servicing side relate to the current recovery from the latest recession. Given the CRE industry’s history over the past 20 to 30 years, does anyone really doubt that it won’t be too many years before a special-servicing component will be a very handy part of Starwood’s corporate arsenal?

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