Friday, April 17, 2009

CRE Performance by Property Type: It’s the Tenants

Zero Hedge has a chart this morning showing CRE loan performance by property type. The information supports the idea that loan performance in a downturn is largely driven by tenant type, and specifically the term of the tenant lease.

Here’s the chart:


(Click on image for a larger version in a new window)

The Zero Hedge post has an attribution to Lehman, but not enough information to identify what exactly we’re looking at. About all I can say is it’s clearly CMBS data.

I’ve taken the data, excluded Credit Tenant Leases and Health Care (given the small balances involved, the performance of a few deals could skew the result), and sorted by worst-to-best performance:


Why does it stack up like this? In a market with declining fundamentals, the deterioration in cash flow is largely a result of tenant turnover (more on that here). When a tenant leaves, the new tenant comes in at the new, lower market rate, while the tenants still in occupancy continue to pay at the higher rate. The higher the turnover rate, the faster the reset to the lower market rate. Also, if there are fewer tenants looking for space, when a tenant leaves the vacated space stays vacant longer.

Hence the rankings above. Hotels, obviously, have the highest turnover. In most multifamily projects more than half the tenants move every year, while retail, industrial, manufactured housing, and office tenants move much less often.

The only real surprises here are full service hotels and self storage. Both are performing around 2% better than I would have predicted. The outlook for full service hotels in this recession is not good (see for example, this news release from PKF Consulting), and I would have expected performance more in line with other hotel types. The average self storage tenant rents space longer than you might think (15 months, according to this article), but I’m still surprised by how well that property type is performing.