Fitch: Large Office, Hotel Defaults Drive CMBS Delinquencies

Job losses and subsequent office loan defaults, coupled with continued hotel underperformance, resulted in another monthly increase in U.S. commercial mortgage-backed security (CMBS) delinquencies, according to the latest index results from Fitch Ratings.

U.S. CMBS late-pays rose again in October – up 28 basis points (bps) to 3.86%. The office sector had the highest increase in delinquencies since September, with 19.4% additional delinquencies followed by hotels, with a 16.5% increase.

Delinquency rates for all major property types are as follows:

  • office – 2.29%,
  • hotel – 6.81%,
  • retail – 3.55%,
  • multifamily – 6%, and
  • industrial – 3.09%.

Office delinquencies increased by $557.4 million in October. Contributing to the increase were three newly delinquent loans greater than $50 million each, the largest of which was 550 South Hope St., a $165 million loan in GSMSC 2007-GG10.

The loan transferred to the special servicer in August after the borrower, Maguire Properties, stated that it would no longer fund the debt service shortfalls. Cashflow from the property has not increased to the banker's underwritten expectations at issuance, as lease expirations are not yielding the higher assumed rental rates.

"Though longer leases on office properties have historically mitigated sharp changes in performance, continued job losses are expected to increase pressure on the office sector," says Fitch's managing director and U.S. CMBS group head, Susan Merrick. "With the looming possibility of leases expiring on space under-utilized by companies that have downsized, office performance may not reach a trough for a few years."

However, it should be noted that even with the increase in October, the office sector's 2.29% delinquency rate is the lowest of the commercial sectors.

Hotel delinquencies increased by $493.9 million in October. The hotel sector has the highest property type delinquency index at 6.81%, with nine delinquent loans over $100 million each. Newly delinquent hotel loans included three related Red Roof Inn loans that had been included in the index in August. The loans, totaling $292.8 million, became 60 days late after reverting to 30 days in September.

The largest newly delinquent loan in the index is Riverton Apartment – a $225 million loan collateralized by a 1,230 unit, rent-stabilized, multifamily housing project located in Harlem, N.Y. The loan has been in special servicing since August 2008, after the borrower was unable to convert rent-stabilized units to deregulated units as quickly as projected when the loan was underwritten. The loan had been using debt service reserves to remain current.

By dollar balance, retail loans continued to lead the index, with $4.9 billion of delinquent loans. The delinquency volume for multifamily loans rose only slightly to $4 billion from $3.9 billion in September, while hotel loan delinquencies increased from $3 billion in September to a total of $3.5 billion in October. Loans collateralized by industrial properties ended the month with $746 million of delinquencies – a 3.8% month-over-month increase.

SOURCE: Fitch Ratings


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