A recent Standard & Poor's quarterly survey reported that the domestic CMBS delinquency rate in 1Q05 fell to 1.04%, decreasing from 1.18% at year-end 2004, and from its 1.96% peak at the end of 2003. While the decline is partially attributed to the large amount of new issuance, S&P stated there have also been fewer actual delinquencies. For example, in 1Q04, delinquencies totaled $3.98 billion, $3.38 billion at the end of 2004, and $3.04 billion at the end of 1Q05. S&P attributed the improvement to several factors, including liquidity, low interest and capitalization rates, property appreciation, job growth, improving real estate fundamentals and attractive relative yields.

Looking ahead to the remainder of the year, S&P believes delinquency levels will remain low. While interest rates are expected to rise modestly, it shouldn't be enough to impair a borrower's ability to make monthly payments or to refinance, adds the rating agency added. Also, the broadening investor base and strong demand provides excellent liquidity for refinancings. Improvement in 30- and 60-day delinquencies - down 34% and 50%, respectively - from the last quarter is also an encouraging sign.

By type, S&P noted that multifamily delinquencies moved lower. There has been a slight improvement in vacancy rates and rent increases. At the end of March 2005, the delinquency rate was 1.70% versus 1.86% at the end of 2004. S&P's review also showed delinquency declines for lodging (down 37 basis points to 2.90%), and retail (down 12 basis points to 0.46%). Office properties showed a three basis point increase to 0.77%, as did industrial sectors that gained seven basis points to 1.51%.

During the first quarter, ratings upgrades exceeded downgrades. S&P said it initiated 99 upgrades and 43 downgrades for a 2.3:1 ratio. This compares to a 0.92:1 ratio for the same period in 2004. S&P also stated that a number of the upgrades were related to strong defeasance during the quarter. Also noted was that a large number of the downgrades were in floating rate, particularly office properties.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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