According to Moody's Investors Service's annual survey of the economic diversity of commercial mortgage-backed securities, released last week, CMBS deals benefit from U.S. cities becoming more economically diverse.
The report reaffirms the importance of a city's or metropolitan statistical area's (MSA) economic diversity for the credit assessment of CMBS deals.
"When mortgage pools pay down gradually and smoothly, they tend to parallel the national benchmark. Because the economy has remained strong and real estate markets stable, most pools have performed well," say Sally Gordon, John Chen, and Natasa Agathocleous, analysts and the study's authors.
The study also notes that American cities are becoming more economically diverse, with fewer cities dependent on one or two dominant industries for their economic health.
The 59 transactions in the study, totaling $58 billion and originated between 1996 and 2000, have generally remained stable or improved slightly for economic diversity, mirroring the increasing economic diversity of most of the country's major urban areas, Moody's analysts say.
Over a period of five years or so, the "single most powerful factor in any deterioration among diversity scores for transactions was a loss in geographic dispersion based on pool paydowns, such as what happened to a few deals in 1996 and 1997," the analysts say.
Geographic dispersion in the distribution of economic sectors in the mortgage pool compared to the national norm for the sector.
Seasoned pools are most affected by mortgages prepaying or paying down unevenly, thus impairing the economic diversity of older pools. Also, floating-rate deals may experience more changes in economic diversity because of refinancing.
Several major metro areas that are frequently represented in CMBS transactions, including New York and Los Angeles, are less diverse than is generally assumed, with New York ranking 77th for economic diversity and Los Angeles in 54th place.
"New York has above-average concentrations in finance and textile and apparel, with 5.4 times the national average for financial industry concentrations," the analysts say, adding, "Los Angeles' economy is substantially over-weighted in textiles and apparel, aerospace and defense, and leisure, amusement and recreation."
Moody's composite economic diversity score for CMBS has three components: the ratio of employment in each of 34 sectors compared to national averages; diversity of the MSAs themselves when a given sector prevails; and the distribution of particular sectors among the cities represented in the mortgage pool, compared to the U.S. norm.