Increasing Mixed-Use Warranties in CMBS Conduit – Trade Observer
“Loans secured by mixed-use properties accounted for approximately 8% of total conduit issuance in 2021 after nearly reaching 10% in 2020,” wrote Marc McDevitt, senior managing director at CRED iQ.
“The mixed-use property type, which carries its own classification in service reports, was partly able to balance the lower volume of loans secured by hotel and commercial properties, which saw cash flow disrupted. by the pandemic. Although retail guarantees accounted for around 19% of conduit issuance in 2021, accommodation guarantees only accounted for around 4%, which was comparatively lower than trends in previous years.
“The inclusion of mixed-use collateral in CMBS transactions has shown a steady, if somewhat erratic, increase in lending frequency and amount of outstanding debt since 2010. CMBS conduit transactions with a year 2017 have the highest amount of outstanding debt secured. by mixed-use properties with over $4 billion.
“After peaking in volume in 2017, mixed-use collateral in CMBS conduits declined over 50% in 2018 before rebounding to over $3.7 billion in 2019. Conduit transaction volume declined in 2020 and 2021, compared to 2019, but the concentration of mixed-use properties within collateral pools remained in line with the high levels of the past 10 years, totaling around 9% in 2020 and 8% in 2021.
“A property may be classified as mixed-use when revenue from an alternative use component of the property is a specified percentage of total revenue. The most common type of mixed-use collateral is an office building with a retail component on the ground floor. With over 1,700 mixed-use properties in CMBS conduit transactions that CRED iQ monitors, approximately 42% of properties (47% in terms of outstanding debt) have combined retail/office use. Combinations of multi-family properties with commercial components are the second most common type of property mix, accounting for 15% of total mixed-use properties (7% by outstanding debt).
“At a more granular level, many properties are classified as mixed-use in the CMBS reporting package, even if the type of use is singular in nature. This is often the case for properties that are part of portfolios that secure a single mortgage. Although these loans are secured by mixed-use wallets, individual assets have a singular use.
“Including mixed-use portfolios, CRED iQ represented over 40 property-use combinations for mixed-use mortgage collateral. Other types of single-use properties that can be classified as mixed-use include event facilities such as design centers, showrooms, galleries, or other types of event spaces Even a variety of social clubs have emerged as mixed-use collateral for CMBS loans, although these types of properties have the most common features with retail.
“Often, the physical layout of a mixed-use building or property belies the true nature of the underlying operations. For example, GM Building’s $2.3 billion loan is secured by a 50-story, 2 million square foot office tower with an iconic retail element at its base – the flagship Apple store, brands of DIOR and Balenciaga designers, and a flagship store for Under Armor (or FAO Schwarz for the nostalgic) are the highlights of the GM building’s retail offering. Although the commercial component of the GM Building represents only approximately 9% of the building’s total net leasable area, commercial tenants accounted for approximately 26% of base rents at the time the loan was originated.
“The largest mixed-use property by property size and number of uses is McClellan Business Park in Sacramento, Calif., which secures a $358 million mortgage. At nearly 7 million square feet, the business park primarily comprises industrial (82% of NRA) and office (15% of NRA), but also includes residential and commercial buildings as well as warehouses. aerodrome.
“As different property types fall out of favor or gain popularity from a lending perspective, mixed-use collateral can have the advantage of providing cash flow diversification from multiple real estate sectors. Additionally, the physical structure of a mixed-use property may be more susceptible to repositioning if a particular use case becomes impaired. Relatively newer mixed-use suits include life science components, which have separate layouts with office, laboratory, and manufacturing features.
“Almost all mixed-use properties with a life science component were under a conduit agreement from 2019 or later. Given the value-added nature of commercial real estate, properties can evolve to their best use over time, which may require generating cash flow from multiple types of mixed-use combinations. When evaluating mixed-use property types, it’s important to ask, “What’s in your warranty?” »