When it comes to the commercial-mortgage bond market these days,location is everything.

From Webster, Texas to Providence, Rhode Island, borrowers inthe U.S. are coming up short, unable to get new loans as about $59billion in mortgages packaged into bonds comes due in 2012,according to data compiled by Bloomberg. In contrast, $930 millionhas been refinanced on two New York skyscrapers in the past month:Vornado Realty Trust's Park Avenue tower and Sheldon Solow's 9 West57th Street, home to Chanel SA and KKR & Co.

Lenders are reluctant to venture from major urban centers,making it harder for property owners in smaller cities to refinanceeven as unemployment falls to the lowest since February 2009 andconfidence in the economic recovery grows. Banks and insurancecompanies are funneling cash to a select pool of borrowers asmortgages from the real-estate boom start maturing after valuesfell 42 percent since 2007.

“Having a New York City trophy asset in a CMBS deal, if it is atrue trophy, generally is a positive for investors,” said JuliaTcherkassova, a commercial-mortgage bond analyst at BarclaysCapital in New York. Outside of major metropolitan areas “there aregoing to be fewer competitors bidding and when the buildings losetenants it's difficult to replace them.”

More than half of the $19 billion in commercial property loanspackaged into bonds in 2007 that mature this year may fail to berefinanced, according to Standard & Poor's. Almost $8 billionin commercial mortgages on New York real estate comes due thisyear, including $3 billion of five-year loans, according to TreppLLC, a mortgage data provider.

Insurers and international banks have zeroed in on lending tothe strongest borrowers in the best markets since 2010, accordingto Ben Thypin, director of market analysis for Real CapitalAnalytics, a New York-based research firm. While appetite forso-called trophy assets will continue in 2012, some lenders maypush into smaller markets, he said.

“One of the big questions this year is whether or not thetrickle of activity we saw move into secondary and tertiary marketsin 2011 becomes more of a flood,” Thypin said. “The economy is abig determining factor.”

The U.S. added 200,000 jobs in December and the unemploymentrate declined to an almost three-year low of 8.5 percent. Investorconfidence in commercial property debt is also rising with abenchmark gauge at about the highest since July.

The CMBX.NA.AJ.4, tied to classes of originally AAA ratedcommercial debt most exposed to losses, has jumped 20.2 cents to66.8 cents on the dollar since Oct. 18, after dropping from 84.8 inFebruary, according to Markit, the index administrator.

Extra Yield

The extra yield investors demand to hold top-rankedcommercial-mortgage bonds rather than Treasuries has declined to2.31 percentage points from 2.61 percentage points this year,according to the Barclays Capital CMBS AAA Super Duper Index.

That may not be enough to bail out the Baybrook Gateway Mall inWebster, Texas, 22 miles (35 kilometers) northwest of Houston.

A $41 million mortgage on the shopping center, originated byGoldman Sachs Group Inc. in December 2006 and sold as part of acommercial-mortgage bond deal two months later, was handed over toa firm that handles troubled loans because the borrower couldn'trefinance debt that matured this month, according to Fitch Ratings.So-called special servicers determine whether to modify loan termsor foreclose on property owners struggling to make payments.

Baybrook, co-owned by Blackstone Group LP's Brixmor PropertyGroup Inc. and JP Morgan Chase & Co., is currently working withthe special servicer to resolve the finances, Stacy Slater, aspokeswoman for Brixmor, said in a telephone call. The mall losttenants, such as Linens 'n Things Inc. which filed for bankruptcyin 2008, she said, declining to comment further.

A $43.5 million mortgage on One Citizens Plaza, a 224,089square-foot office building that houses the headquarters ofCitizens Financial Group in Providence, Rhode Island, also ran intotrouble this month before its Jan. 11 maturity date, according toFitch. Though the building was 98 percent occupied as of September,the borrower didn't repay the mortgage originated by Wachovia Corp.in 2006, Bloomberg data show.

“We are just beginning communications with the lender about thisloan,” said David Snyder, chief financial officer of KBS RealtyAdvisors, a private-equity real estate investment company inNewport Beach, California that owns the property. “At this juncturewe are unable to predict the outcome,” he said in an e-mail.

Late Payments

Late payments on loans packaged into bonds are at 8.95 percentin December, down from 9 percent in November, according to anS&P report. The rating company forecasts delinquencies willrise to between 9.5 percent and 10 percent in 2012.

Borrowers with prime properties in the best neighborhoods ofManhattan, such as the area between 42nd Street and Central Park,aren't likely to struggle to pay down debt, even as they deal withoverhang from the boom years, according to Peter DiCorpo, presidentof CBRE Global Investors U.S. managed accounts group.

“The assets around Grand Central or near the park district aregoing to do well all day,” said DiCorpo, who is based in LosAngeles. “If you have an asset that is way off the beaten path,that is going to be a harder sell.”

After losing more than half of their value from the September2007 peak, Manhattan office properties have recovered to 2006levels and remain about 20 percent below the top of the market,Green Street Advisors Inc., a real estate research firm, said Jan.6. Overall commercial property values in the U.S. will be atcurrent levels or slightly lower through 2014, Moody's InvestorsService said in a December report.

Vornado, which owns more than 100 million square feet of U.S.properties, acquired the 538,000-square-foot (50,000- square-meter)tower at 350 Park Avenue in December 2006 for $541.5 million. Thebuilding was one of several in Midtown Manhattan that were boughtfor more than $1,000 a square foot during the property boom.

When faced with a $430 million loan maturing this month, Vornadogot $300 million from New York Community Bank and paid thedifference in cash, according to a person familiar with the deal,who declined to be identified because they weren't authorized tospeak publicly. The original loan was packaged into securities byWachovia in March 2007.

“There is a long line of people who are willing and able torecapitalize trophy assets,” said Harris Trifon, global head ofcommercial real estate debt research at Deutsche Bank AG in NewYork.

'Better-Than-Expected'

The result for bond investors was a “better-than-expectedresolution, given the sponsor's decision to fund the gap withcash,” said Tcherkassova of Barclays.

Mark Semer, a Vornado spokesman, declined to comment.

In December, New York City developer Solow obtained $625 millionin financing from Deutsche Bank to pay off $500 million infive-year debt scheduled to mature next month on 9 West 57th. Theproperty, with its panoramic views of Central Park, commands someof Manhattan's highest rents. Some of the maturing debt was part ofthe same $7.9 billion deal sold by Wachovia that included Vornado's350 Park Avenue loan, Bloomberg data show.

High-profile towers became more prevalent in commercial-mortgage bond offerings as deals became larger and Wall Streetbanks gave borrowers the most favorable terms, such as assigningproperty values based on projections of future rent growth,according to Tcherkassova.

Sales of commercial-mortgage bonds reached a record $234 billionin 2007, Bloomberg data show. Issuance tumbled to $12.2 billion in2008 as credit markets seized. The market stayed shut untilNovember 2009. Banks arranged $28 billion in 2011, compared with$11.5 billion in 2010, Bloomberg data show.

Lenders pulled back from making new commercial mortgages forsale as bonds as the European debt crisis rattled markets in Julyand August, threatening to choke off funding to borrowers with debtcoming due in smaller cities where commercial mortgage backedsecurities lenders are more competitive.

Originations have resumed, with Goldman Sachs and Citigroup Inc.set to sell $1 billion in debt tied to shopping centers, hotels andoffice buildings this week, Bloomberg data show.

“What we have is a tale of two cities,” Ambrose Fisher, managingdirector for Oaktree Capital Management LP, a Los Angeles-basedinvestment firm with $73 billion in assets under management, saidat a Jan. 20 conference on real estate opportunity investing inLaguna Beach, California. “Outside the core markets and the coreproducts, it's difficult to get financing.”

Bloomberg News