What a difference a year, or three, makes.
Back in 2007, CMBS delinquencies were at lows. This year, CMBS delinquencies are making headlines of a different sort for touching new highs. And it's going to get worse before it gets better.
Fitch Ratings for one has reported that 6% of the loans in the universe of loans it has rated are more than 60 days delinquent as of February 2010. A year ago, the figure was at 0.88%.
Mary MacNeill, a Fitch managing director, attributed the jump to a number of larger loans that have gone delinquent. A year from now, the rating agency expects the delinquencies to touch 9%.
Broken down by property type, Fitch's 60-day-plus delinquency rates show some divergence.
Multifamily and hotel properties have been worst hit, with delinquencies of 8.33% and 16.44%, respectively. Retail properties, at 4.94%, industrial, at 3.73%, and office, at 3.06%, appear much milder in comparison.
The hotel and multifamily delinquency figures have likely been skewed due to some large loan delinquencies, including the high-profile Stuyvesant Town default on the multifamily side, according to MacNeill.
Fitch has identified a number of loans with a balance of over $100 million as loans of concern. These loans were securitized in 2005 or later, after underwriting standards began to deteriorate.
"We expect many of those will default over the next several years. And just any one large loan obviously brings the delinquency rate up pretty high," MacNeill noted.
McNeil sees CMBS delinquencies in this cycle shaping up to be worse than the delinquencies situation of the 1991 downturn, peaking at 12% in 2012.
Richard Parkus, head of commercial real estate debt research at Deutsche Bank Securities, also expects that the delinquency peak in the 1991 downturn will come off looking favorable compared to this cycle's peak.
At its peak, defaults on life company loans in the 1991 downturn were in the 4% to 5% range, according to Parkus. In this cycle, he says CMBS delinquencies could exceed the 9% to 10% range.
How bad the situation could get depends not only on the flow of new loans going bad, but also on the speed with which the bad loans get resolved.
About 6% of all loans per year are going bad currently, with the rate touching 8% for the problem vintages of 2005, 2006 and 2007. If the loans were to be resolved very quickly, Parkus doesn't expect the delinquency rate to rise as high as 10%.
"The problem right now is that resolving delinquent loans requires either liquidating or foreclosing. That takes a number of years. That's problematic because financing is restricted. Many of the restructurings are very complex and time-consuming negotiations," Parkus said.
Adding to the bleak outlook for the sector is that most loans that are due to mature over the next few years will likely not qualify to refinance, considering the high loan-to-value ratios involved. While these loans might be extended in the short term, they will have to payoff and be dealt with at some point.
The market is already touching a bottom in terms of commercial real estate prices, according to Parkus, with prices already down 45% from peak levels on average. He expects commercial real estate fundamentals to touch a bottom over the next 12 to 18 months, considering that most of the rent and vacancy declines are already in place.
Commercial real estate delinquencies, which are a lagging indicator that follows the fundamentals, could touch 8% to 9% by the end of 2010.
Deutsche Bank expects hotel and multifamily delinquencies to be worst hit in this cycle, with delinquencies hitting 15% by the end of 2010, considering that these property types have very short-term leases compared to other property types.
Parkus sees delinquencies touching 8% to 9% by yearend for office properties as well as retail properties. And industrial properties could see a delinquency rate of 7% to 8%.
As for the impact on geographic areas, those worst hit in terms of commercial property performance are also those that bore the brunt of the housing market downturn, including Florida, Southern California, Nevada, and Arizona. - Poonkulali Thangavelu
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