Fitch’s CMBS Delinquency Index Hits New Peak

loan defaults, coupled with declining performance on multifamily and retail properties, resulted in a 29 basis point (bp) climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index. This marks the highest percentage of delinquencies since Fitch began its Index in 2001. ‘Defaults on larger loans continue to drive delinquency increases, because later-vintage transactions have larger loans, many underwritten with now unrealized pro forma income, as well as now-depleted debt-service reserves and high leverage,’ said Managing Director and U.S. CMBS Group Head Susan Merrick in a press statement. In total, the Loan Delinquency Index now includes 19 loans or crossed portfolios with balances of $50 million or greater, of which eight are in excess of $100 million. By comparison, in May 2008, only two loans had a balance over $50 million. Of the loans greater than $50 million, eight are retail properties, seven are multifamily and six are hotels. Two of the largest 10 delinquent loans were newly added in May: the $160 million Mansions Multifamily Portfolio consisting of four cross-collateralized and cross-defaulted loans, and the $86 million Arizona Retail Portfolio, both of which are in 2007 vintage transactions. Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types, Fitch adds. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn. The 60 days or more delinquency rate for retail properties is 2.24%, which is slightly higher than the Index. Fitch analysts expect this number to climb. The agency currently tracks $3.1 billion of 60 days or more delinquent retail loans. An additional $1.1 billion of retail loans were 30 days delinquent at month's end – 30% higher than the amount in April. As consumer spending continues to tighten, retail properties will likely lose tenants to bankruptcy or store downsizing. "With lower income due to declining occupancies, borrowers will be more challenged to meet their debt-service obligations," Merrick added. Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform the Index, with a 1.91% delinquency rate. Possible reasons for the relative resilience include generally more sophisticated sponsorship and management teams; slightly lower leverage and shorter amortization schedules at issuance; and a reporting lag whereby many year-end audited financials have not yet been finalized, Fitch says. Fitch maintains its expectation that, as occupancy rates and revenues per available room continue to decline, putting additional stress on borrowers' operating margins, defaults could rise precipitously. SOURCE: Fitch


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