CMBS Sector Sees Jump in Special Servicing Loans

CMBS loan delinquencies and defaults are pushing up special servicing volume at a blistering pace, according to a pair of first-quarter updates published last week by Fitch Ratings. During the first three months of 2009, the balance of loans rated by Fitch in special servicing jumped 48 percent to $23.7 billion, representing 758 loans. Imminent default was cited as the reason for 73 percent of the special-servicing transfers as measured by unpaid loan balances. That trend picked up the momentum from 2008, when specially serviced loan balances ballooned 248 percent to $16 billion. Since the end of 2007, the percentage of CMBS loans in special servicing has grown from 0.54 percent to 2.86 percent. Last month’s bankruptcy filing by General Growth Properties Inc., which includes 150-plus properties, will boost the total considerably, Fitch predicted. Bearing out the expectations of many real estate finance professionals, loans from the peak CMBS issuance period of 2006 to 2008 are the main source of new special-servicing transfers. During the first quarter, 65 percent of loans put into special servicing were of that vintage. Multi-family properties continue to yield the largest share, making up 35 percent of the first-quarter total. Retail loans were another 27 percent of special-service transfers, but Fitch reiterated its earlier predictions that retail loans will eventually exceed multi-family to become the biggest source of CMBS special servicing. Office loans accounted for 18 percent of new CMBS special servicing in the first quarter, followed by hospitality (8 percent) and industrial (3 percent). In addition to CMBS loans already in special servicing, Fitch is also keeping its eye on several thousand other loans. Of that total, 514 loans valued at $5.3 billion are still considered non-delinquent, but not all of those loans are likely to become delinquent. Ten times as many loans–5,205–are categorized by Fitch as “loans of concern.” More than two thirds of them are part of CMBS issued in 2006 and 2007. The rising tide of CMBS loans merits watching special servicers to see whether they have the resources to handle the demand, Fitch noted. “With the special servicing transfers that have occurred year to date in 2009, Fitch believes that while special servicers have reached capacity, they remain prepared,” the ratings agency states. By the end of the first quarter, asset managers at the 10 most active special servicers handled an average of 14.5 assets each, an increase from 9.4 assets in only three months. The larger, complex loans of recent vintage create a special need for additional staff, and so far most special servicers are responding by adding experienced and junior asset managers as well as analysts, Fitch concludes.