CMBS Delinquencies Speeding Up: Fitch

Back in January 2008, long before the capital markets took their astonishing twists, Fitch Ratings made a sobering prediction: By the end of the year, its CMBS loan delinquency index would be double or triple the 0.28 percent recorded at the end of 2007. Fitch’s crystal ball turned out to be right on the money. On Friday the ratings agency reported that CMBS delinquency reached 0.64 percent for November. At this pace, Fitch projects that CMBS delinquencies could hit 2 percent by the end of 2009.A bad month or two does not necessarily make a trend, and Fitch often notes that one large delinquent CMBS loan bundle can skew the entire national picture. And the proportion of delinquent loans–those at least 60 days past due–still reflects only a small fraction of the nationwide CMBS inventory rated by Fitch. That said, the most recent findings suggest some troubling trends. As the souring economy catches up with tenants and landlords, problem loans appears to be growing at a more rapid clip. For the first three quarters of 2008, monthly increases in CMBS delinquency stayed in the modest 1 percent to 4 percent range. But last month, that trickle started to look more like a wave. Following a 6-point uptick in October, the delinquency rate took its biggest one-month jump of the year–13 basis points. By contrast, it took from January to June for CMBS delinquencies to increase just 14 points. Another trend appears to be a shift in the most problematic property sectors. Early this year, multi-family loans often topped Fitch’s delinquency index. Last month, however, retail properties were the biggest single culprit. The number of retail loans that became newly delinquent in November grew 64 percent last month, totaling 29 loans valued at $397 million. All told, .63 percent of retail loans were at least 60 days or more past due. The nature of retail properties involved may be changing, too. Until recently, most retail loan delinquencies involved maturity default. Now, however, delinquency often stems from non-performing loans as retail property owners lack the cash flow to make payments on time. The scale of retail properties affected by loan delinquencies could be changing, too. As recently as September, Fitch noted that most delinquent retail loans were relatively small and involved strip centers and older community centers or power centers that are struggling to compete with newer centers nearby. But last month, delinquency hit several larger loans secured by bigger retail properties. A $137.2 portfolio loan collateralized by two malls and a $73.6 million loan secured by four centers. The Lightstone Group is the borrower in both cases. Although growing problems point to more CMBS delinquencies in the retail sector, other property sectors are hardly off the hook. “Fitch anticipates that the deepening recession will lead to declining fundamentals across property types for 2009,” the firm’s CMBS group leader, Susan Merrick, noted in a statement Friday. For example, slowing business and leisure travel spells trouble for the hospitality industry. In November, the volume of delinquent CMBS hotel loans stood at .48 percent.