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Cumulative Loan Defaults Rise Above 10%

Cumulative defaults for fixed-rate U.S. CMBS rose significantly by112 basis points to 10.6% through the end of 3Q10, Fitch Ratings reported in its latest U.S. CMBS newsletter.

"Loans continue to default at a record pace, with large loans driving the trend," said Mary MacNeill, a managing director at Fitch. "Hotel and office properties were the largest contributors to defaults this past quarter."

Loan defaults for this year are already at $21.66 billion and have already gone over 2009 levels that reached $17.75 billion by loan balance. The number of loan defaults through 3Q10, which was 1,452, is almost the same as 2009 figures at 1,464, Fitch said.

Cumulative default rates increased 286 basis points for hotel loans while its 115 basis points for office loans. The largest three defaults in 3Q10 were the following: Innkeepers Portfolio ($825 million hotel; 2007 vintage); One Alliance Center ($165 office; 2007 vintage); and Highwoods Portfolio ($160 office; 2005 vintage).

Despite the rising default rates, Moody's Investors Service said yesterday that commercial real estate (CRE) markets across the U.S. continued on a trend of improvement in 3Q10.

With conditions improving dramatically in the two hotel sectors, all seven property types that are tracked by Moody's Red-Yellow-Green® report have moved out of market conditions seen as weak or in the Red category.

"In general, the commercial real estate markets remain in the uncertain yellow range," said Keith Banhazl, a Moody's vice president. "However, the future appears to brighten with each passing quarter."

He said that all property types except suburban offices have positive demand forecasts in the next year. Given the minimal new supply, projected absorption should cause vacancy rates to turn the corner and start coming down in 2011, Moody's said.

In 3Q10, Moody's said that all seven property types experienced improved scores that indicated better market conditions, with only the multifamily sector not posting improvement in its supply-demand ratio.

The vaulting of the two hotel property types from deep red territory into yellow showed improvements in their year-over-year revenue per available room measures, the rating agency said.

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