CMBS Delinquencies Reach 3-Year Low, Risks Remain

It took two loan modifications to drive down the delinquency rate of securitized commercial mortgage loans in February and keep rolling a nine month trend of steady improvement.

The Fitch Ratings CMBS Delinquency Index shows in February late payments declined 30 basis points to 7.61% from 7.91% in January.

Two high-profile loans, $195.1 million Babcock & Brown FX 3 portfolio (CSMC 2006-C4) and the $190 million One Congress Street (WBCMT 2007-C30), were removed from Fitch’s index upon modification.

As larger loans get resolved, explained  Fitch managing director, Mary MacNeill, “Steep month-over-month declines in CMBS delinquencies are likely to continue” even though many loans over $100 million remain in the index.

The current balance of unresolved loans declined further in February as fewer delinquencies brought the dollar balance of delinquent loans “below the $30 billion mark for the first time since February 2010,” Fitch said.

Delinquency rates by sector improved across the board with the industrial CMBS index dropping to 9.61% from 8.69% in January, multifamily to 9.14% from 9.73%, hotel to 8.32% from 8.76%, office to 8.18% from 8.33% and retail to 7.35% from 7.43%.

New CMBS issuance, which in February saw the largest monthly increase in over five years, also helped bring the delinquency rate down, Fitch said. Seven Fitch-rated transactions totaling $6.62 billion closed in February surpassing the previous post-recession high of $6.57 billion reported in November 2012.

Other insiders expect the CMBS and the overall CRE market will see continuous improvement this year, but also warn about risks ahead.

If at the beginning of 2012 the outlook for CMBS was tepid at best, according to a Morningstar Credit Ratings report, continuing improvement of fundamentals and enhanced commercial real estate loan performance are expected to drive lending for 2013, especially for Class A properties, as banks “continue to streamline underwriting standards and increase commercial mortgage originations.”

Although increasing bank leniency and improved fundamentals are reviving the CMBS market, analysts wrote, many loans that mature in 2013 “remain exposed to balloon risk.”

They warn caution when originating and refinancing “non-trophy” properties, or “properties located in secondary and tertiary markets.” They find that new regulation provisions on enhanced risk retention requirements and higher capital charges “could limit lending, increase borrowing costs, and create a gap in financing” of many types of assets. Ultimately, they note, loans scheduled to mature in 2013 “are still plagued by increased delinquency and underwater collateral.”