S&P Expresses Concern About 2012 CMBS Market

S&P Expresses Concern About 2012 CMBS Market Two new reports issued by Standard & Poor's (S&P) are raising significant concerns about the state of the U.S. commercial mortgage-backed securities (CMBS) market.

One report focusing on the industrial sector within commercial real estate notes that the sector reached a 22-year high on its industry CMBS delinquency rate, which measured at 12.05%. S&P also determined that 47% of rated industrial CMBS collateral has experienced declines in net operating income (NOI) since issuance, and half of these loans are reporting decreases greater than 20%.

The industrial segment is the only major CMBS property type for which delinquencies are currently at historical highs, according to S&P data dating back to 1990. Based on servicer-provided NOI, over 47% of CMBS industrial collateral has experienced declines since issuance. Furthermore, the industrial sector report found that $2.4 billion of industrial loans are scheduled to mature next year.

‘With industrial vacancy rates at historical highs and rents remaining stagnant or falling, we don't expect much near-term improvement in NOI at the property level, and it could even decline for certain properties and markets,’ says Standard & Poor's credit analyst Larry Kay. ‘It is our view that the growing volume of maturing loans, paired with declining NOI for many, will prevent industrial delinquencies from improving in the first half of 2012.’

Separately, S&P reports that $55 billion of U.S. CMBS loans are scheduled to mature next year, including $19 billion in 2007-vintage maturities. S&P warns 50% to 60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, with retail loans at the greatest risk. The ratings agency predicts that maturity extensions will continue ‘at a healthy rate,’ but payoff rates may fall further. S&P's delinquency rate forecast for 2012 remains unchanged at 9.50% to around 10%, and it adds that the loss severity rate isn't likely to improve much in the first half of 2012.

‘2012 will also usher in the first major wave of maturities from the 2007 vintage, which were issued during a frothy period at the peak of the market,’ says Kay. ‘Although we expect upcoming maturities in a tight lending environment to put upward pressure on delinquencies, other factors are at work that could limit the increase. The modest improvement that we expect in property fundamentals and collateral performance should help to contain any significant increase in delinquencies.’


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