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2012 CMBS Defaults Lowest Level in Five Years

APR 3, 2013 12:41pm ET
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Loans securing commercial mortgage-backed securities finished 2012 at their lowest levels of new defaults since 2008, down 46% since 2011 and 67% lower from peak levels in 2010, according to Fitch Ratings.

In total, 557 loans totaling $7.3 billion defaulted in 2012, compared with 950 totaling $13.8 billion in 2011 and 1,477 totaling $22.1 billion in 2010.

And the good news is that the trend is expected to continue for this year. “Commercial real estate loan defaults are on pace to decline again in 2013, albeit at a more modest pace,” said Fitch senior director Britt Johnson. “With new issuance gradually increasing and default levels likely to remain stable, cumulative CMBS defaults are not likely to exceed 14% by the end of this year.” The 2012 cumulative default rate was 13.4%.

Regarding new issuance, Fitch pointed out that in 2012, there were $24.7 billion in loans added to the default study data, compared with $18.8 billion in 2011 and $4.2 billion in 2010. “Issuance in 2013 is expected to at least be on par with that of 2012. Therefore, it is likely cumulative default rates will remain relatively stable with consistent to lower levels of loan defaults,” the report said.

However, the CMBS originated in 2007, a year where underwriting standards were lacking, still had a high default rate, with 58% (or $4.3 billion) going bad last year. Many of these loans were for five-year terms and high defaults were expected.

By property type, office buildings represented 45% of the new defaults, while retail properties represented 33%.

“Helping to keep new CMBS default rates stable is the fact that servicers are still modifying loans before a monetary default,” said Johnson. “If modified loans that were never categorized as in default are included, the 2012 cumulative default rate would be 15.8% instead of 13.4%.”

Fitch added that commercial loan modifications are often thought of as a resolution to a defaulted loan, but almost 42% of loans classified as modified never actually defaulted. There were 41 loans totaling $2.0 billion in fixed-rate conduit or large-loan deals that had never defaulted, but were classified as modified by the servicers in 2012. In 2011, 77 loans totaling $2.3 billion were classified as modified but never defaulted.

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