Fitch Finds Correlation Between CMBS Loan Defaults And Weak Housing Markets

Weak U.S. housing markets and rising unemployment at the state level are leading indicators of deteriorating commercial property loan performance, according to Fitch Ratings. As a result, Fitch expects commercial properties in the most impacted states to continue to face greater cashflow stress until the housing market and unemployment begin to show signs of recovery.

Among major property types, U.S. commercial mortgage-backed securities loans backed by multifamily, retail and office properties are defaulting almost 30% more frequently in states most impacted by these economic factors. In contrast, hotel defaults correlate more closely to broader economic factors, including gross domestic product, consumer spending and corporate earnings.

‘Though commercial loan default rates are rising nationally, properties in Florida, Michigan, Arizona, Nevada and California are proving to be particularly vulnerable,’ says Managing Director Eric Rothfeld. ‘These states represent approximately 25% of all retail, office and multifamily loans in Fitch-rated U.S. CMBS transactions and are likely to see more rapid and material declines in performance.’

Through the end of January 2009, housing prices in these states have experienced peak-value declines almost 50% higher than nationwide averages, foreclosure rates almost 20% higher and local unemployment rates almost 20% higher.

Although the commercial sector had remained somewhat resistant to housing market pressures through the third-quarter 2008, commercial real estate loan defaults as of the end of January 2009 increased to 1.15% from 0.43% in September 2008.

Multifamily loans in these states have a default rate of 4.1% – the highest of any property type and more than 20% above the national average. Speculative multifamily construction in these states outpaced nationwide levels, and supply has not been absorbed as expected, Fitch says. In addition, further competition has developed from single-family homes that have entered the rental market as foreclosure rates have increased.

SOURCE: Fitch Ratings


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