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

From Webster, Texas to Providence, Rhode Island, borrowers in the U.S. are coming up short, unable to get new loans as about $59 billion in mortgages packaged into bonds comes due in 2012, according to data compiled by Bloomberg. In contrast, $930 million has been refinanced on two New York skyscrapers in the past month: Vornado Realty Trust's Park Avenue tower and Sheldon Solow's 9 West 57th 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 refinance even as unemployment falls to the lowest since February 2009 and confidence in the economic recovery grows. Banks and insurance companies are funneling cash to a select pool of borrowers as mortgages from the real-estate boom start maturing after values fell 42 percent since 2007.

“Having a New York City trophy asset in a CMBS deal, if it is a true trophy, generally is a positive for investors,” said Julia Tcherkassova, a commercial-mortgage bond analyst at Barclays Capital in New York. Outside of major metropolitan areas “there are going to be fewer competitors bidding and when the buildings lose tenants it's difficult to replace them.”

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

Insurers and international banks have zeroed in on lending to the strongest borrowers in the best markets since 2010, according to Ben Thypin, director of market analysis for Real Capital Analytics, a New York-based research firm. While appetite for so-called trophy assets will continue in 2012, some lenders may push into smaller markets, he said.

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

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

The CMBX.NA.AJ.4, tied to classes of originally AAA rated commercial debt most exposed to losses, has jumped 20.2 cents to 66.8 cents on the dollar since Oct. 18, after dropping from 84.8 in February, according to Markit, the index administrator.

Extra Yield

The extra yield investors demand to hold top-ranked commercial-mortgage bonds rather than Treasuries has declined to 2.31 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 in Webster, Texas, 22 miles (35 kilometers) northwest of Houston.

A $41 million mortgage on the shopping center, originated by Goldman Sachs Group Inc. in December 2006 and sold as part of a commercial-mortgage bond deal two months later, was handed over to a firm that handles troubled loans because the borrower couldn't refinance debt that matured this month, according to Fitch Ratings. So-called special servicers determine whether to modify loan terms or foreclose on property owners struggling to make payments.

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

A $43.5 million mortgage on One Citizens Plaza, a 224,089 square-foot office building that houses the headquarters of Citizens Financial Group in Providence, Rhode Island, also ran into trouble this month before its Jan. 11 maturity date, according to Fitch. 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 this loan,” said David Snyder, chief financial officer of KBS Realty Advisors, a private-equity real estate investment company in Newport Beach, California that owns the property. “At this juncture we 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 percent in December, down from 9 percent in November, according to an S&P report. The rating company forecasts delinquencies will rise to between 9.5 percent and 10 percent in 2012.

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

“The assets around Grand Central or near the park district are going to do well all day,” said DiCorpo, who is based in Los Angeles. “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 September 2007 peak, Manhattan office properties have recovered to 2006 levels 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 at current levels or slightly lower through 2014, Moody's Investors Service 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. The building was one of several in Midtown Manhattan that were bought for more than $1,000 a square foot during the property boom.

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

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

'Better-Than-Expected'

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

Mark Semer, a Vornado spokesman, declined to comment.

In December, New York City developer Solow obtained $625 million in financing from Deutsche Bank to pay off $500 million in five-year debt scheduled to mature next month on 9 West 57th. The property, with its panoramic views of Central Park, commands some of Manhattan's highest rents. Some of the maturing debt was part of the same $7.9 billion deal sold by Wachovia that included Vornado's 350 Park Avenue loan, Bloomberg data show.

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

Sales of commercial-mortgage bonds reached a record $234 billion in 2007, Bloomberg data show. Issuance tumbled to $12.2 billion in 2008 as credit markets seized. The market stayed shut until November 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 for sale as bonds as the European debt crisis rattled markets in July and August, threatening to choke off funding to borrowers with debt coming due in smaller cities where commercial mortgage backed securities 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 and office buildings this week, Bloomberg data show.

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

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