Commercial mortgages had a mixed year in the securitized secondary markets during 2011. The outlook for 2012 is that the sector still faces some hurdles but may hold some opportunities.
One hurdle in the coming year could be five-year loans from 2007, which were originated during a period of relatively loose underwriting and are maturing this year.
The ability to successfully refinance these loans as well as issuance will play a role in how high delinquencies will get, Huxley Somerville, head of U.S. CMBS at Fitch Ratings, said in answer to a question during Fitch's 2012 structured finance outlook conference call. Extensions could continue to cushion the concern around maturing loans. He said delinquencies in the sector have the potential to reach 10% but he said more probable is that they will be maybe 50 basis points to either side of their current level. CMBS loan delinquencies on Fitch's overall index covering the period between 2004 and the present have been at 8.41% and at the beginning of 2011 they had started at 8.23%.
In addition to issuance and maturing loans, clearly the economy will be a factor in determining CMBS delinquency rates in 2012. Sears' decision last week to close more than 100 Kmart and Sears stores and reports about the effect of this on the sector are one example of this.
According to a Morningstar report last week, there are at least 486 CMBS loans with an unpaid principal balance of about $20 billion with exposure to Sears and Kmart as a tenant. Fitch said in a separate report it foresees little risk of a negative rating impact but acknowledged there are about 255 Fitch-rated loans with exposures to the stores.
That being said, there have been some relatively promising signs when it comes to CMBS generally in the past year including some relative stabilization in delinquencies, Somerville said.
Prospects are still good for the multifamily sector, with the exception of legacy CMBS, he said.
David Durning, senior managing director at Prudential Mortgage Capital Co., said multifamily has been “the darling of institutional investors” in the past year and he expects that to continue, although there is some concern about the sector overheating and areas suffering economic strain.
While economic concerns like the planned Sears/Kmart closures could also affect retail going forward, Somerville said in the past year that sector was relatively stable given high unemployment and weak consumer confidence. In general, however, some supermarket-oriented and value-oriented retail could do relatively well. He said he believes the retail bankruptcy wave over the past two years could be an end but excess supply from bankruptcies of companies like Borders are still apparent.
He said Fitch is remaining bullish on tier one malls but watching second and third tier malls in multiborrower deals closely.
Hotels/multifamily have been the leaders in improving metrics over the past two years and he noted that because of their daily mark-to-market situation hotels take advantage of stabilization in general economy more quickly than some other property types.
He said while Fitch is wary of budget hotels, particularly in tertiary areas, overall lack of new supply in recent years could provide a buffer against significant declines if the economy backtracks.
Office still has the potential for negative performance in 2012 but offices in the right location will continue to be stable performers, said Somerville.
Fitch is most concerned about suburban and tertiary markets, he said.