There have been some relative improvements seen in cCMBS delinquencies recently but also some continuing concerns, suggesting that market—while improving in some respects — still could have some hurdles to clear before it bottoms out.


Many factors such as increases in loan resolutions, property sales, loan modifications, and particularly maturity extensions—as well as a pickup in originations—are “limiting delinquency growth,”said Larry Kay, Standard & Poor’s director, CMBS surveillance.

However, he also noted, “We expect that the high unemployment rate will continue to pressure property fundamentals.” The sectors most affected by lackluster job growth and consumer spending — that of office and retail—could continue to weigh on the property markets and CMBS collateral performance, Kay said. (Office and retail constitute about 61% of outstanding CMBS in S&P’s rated universe.)

In addition, maturing loans from the era of relatively looser underwriting are still a concern. He said there is 71% more in terms of loan amounts set to mature in 2011 than in 2010. This includes some floating-rate product there has been some particular concern about.

However, the original panic about unknowns in terms of how these potentially problematic maturing loans will be handled has given way to some extent to practical experience as the industry seems to have, on a case-by-case basis, found ways to deal with them.

“We’ve continued to see more extensions on loans,” Eric Thompson, S&P managing director, CMBS surveillance, told this publication. “Our discussions with special servicers indicate that they are evaluating each situation, and granting extensions if warranted based on expected property performance—and asking for things in return from the borrower (i.e, reserves, etc).” He noted that loan performance trends continue to differ depending on the local market in many cases.

Even when CMBS delinquencies on average have not been growing as fast as they were, they largely have been increasing. By the end of the year, they could exceed 9% on average, Jim Palmisano, managing director-CMBS, told listeners to a recent S&P teleconference.

Another CMBS data provider, Trepp, last week suggested the improvement seen the previous month—which it had advised included some extraordinary loan resolution—reversed in its latest numbers. This was true even in the multifamily segment which — as Beth Campbell, director, real estate investment trust ratings, told listeners to the S&P teleconference — is expected to be the first property type to recover.

During the teleconference, insurance ratings director David Zuber noted that there has not been a discernable bottom to the market yet. Meanwhile, insurers have seen a shift in the stress test S&P uses to a “loan level” approach that is company specific as opposed to a more standard measure used in the past, Zuber said. This is something he noted that issuers have debated.

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