In its most recent conduit and default study, Fitch Ratings said that the CMBS cumulative default rate may reach 5% by year-end, up from the 2003 default rate, which totaled 3.95%.

"Consistent with previous findings, the cumulative amount of CMBS losses remains remarkably small -- only 0.38% of CMBS collateral has been lost over the past 11 years," said analysts from the rating agency.

With the added 489 new defaulted loan in 2003, the total number of loans in Fitch's study that have seen defaults increased to 1,313, or 4% of the 32,797 loans originated in the 222 deals making up the study.

This is equivalent to 3.95% or $8.1 billion of the $204.8 billion in CMBS product defaulted at least once in the past 11 years, on a dollar basis. Aside from this, of the 350 cumulative defaults that were real estate owned (REO) resolutions, 339 had losses. Another 391 of the resolved defaults became current or actually paid off in full without experiencing any losses.

Across varying sectors, Fitch is most concerned with the retail sector, which makes up 30% of total CMBS collateral as well as 26% of defaults on a loan dollar balance. The rating agency added that average loss severity in retail loans is the highest of all traditional property types.

Fitch said that the continuing default rate for each property sector will be impacted by the differing market conditions. Fitch will maintain its close watch on the retail sector.

"Fitch believes the retail industry has been buoyed by homeowner refinancing during the recent period of extremely low interest rates, as source of income to the retail sector that Fitch believes is no longer sustainable," analysts wrote. Fitch added that it expects defaults in the retail sector to rise and are specifically concerned about store closings and bankruptcies in the large chain retailers.

In other sectors, the rating agency expects that multifamily defaults will be less as interest rates on mortgages rise. Analysts predict a continued rise in multifamily defaults, due to overbuilding in a lot of markets.

When it comes to the office sector, defaults rose 163% on a dollar basis last year. However, Fitch sees office defaults continuing until a full economic recovery in sectors that will produce office user and not just service workers, as is the case currently.

The rating agency added that the industrial sector will continue showing mixed performance, with big markets next to ports and large logistic hubs outperforming smaller, manufacturing-focused markets. Fitch also noted the hotel sector's vulnerability to geopolitical events and, without any serious event, sees hotel defaults decreasing.

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