Despite increased loan modification activity and rising new commercial mortgage-backed security (CMBS) issuance, Fitch Ratings projects that CMBS loan defaults will top 12% by the end of the year.
Cumulative loan defaults increased to 10.6% ($57.58 billion) through the end of last year, compared to 6.59% ($35.49 billion) through the end of 2009. The pace of new defaults slowed from $8.41 billion in the first quarter of 2010 to $3.5 billion by the end of the fourth quarter, but Fitch Managing Director Mary MacNeill says it is premature to say defaults have turned the corner.
‘Although CMBS loan defaults declined over the course of 2010, it is still too early to predict a meaningful decline,’ MacNeill says. ‘Commercial real estate fundamentals are still lagging the overall economy.’
By vintage, 2007 CMBS deals had the highest share of loan defaults, with nearly half of all new defaults coming from 2007 transactions. Fitch says recent-vintage large loans are weighing down the CMBS market, with 22 defaulted loans greater than $100 million coming from the 2005-2008 books of business.
Multifamily loans made up 28.4% of the total number of defaults tracked last year. Office and retail followed in second and third place, with 24.2% and 23.7%, respectively. Fitch expects more pain to come for the office sector, whose defaults are likely to continue to rise this year. In 2010, $5.36 billion of loans backed by office properties defaulted, compared to $3.58 billion in 2009.
‘New CMBS loan defaults are likely to be from loans beginning to amortize,’ says Fitch Senior Director Britt Johnson. ‘Future loan defaults are also likely to stem from properties in struggling or slow markets not likely to keep tenants at current rental rates.’
