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CMBS May Have Peaked

The performance of commercial mortgage-backed securities may be peaking, according to Moody's Investors Service, as the real estate cycle runs its course.

This means that the last few years of low loan delinquencies and strong upgrade to downgrade trends for CMBS may be nearing an end.

"Rather than indicating a new paradigm, recent strong CMBS performance may be as good as it gets," according to Tad Philipp, Moody's managing director.

The credit rating agency finds CMBS delinquencies to be inversely related to property prices - as property values rise, delinquencies fall.

Since the first quarter of 2001, commercial property values have gone up 57%, Moody's said, which has suppressed delinquency levels and led to high levels of defeasance activity.

Right now, cap rates (the returns expected by investors) are at all-time lows and rents in many markets are reaching cyclical highs, which causes Mr. Philipp to believe that the property cycle may be turning and that delinquencies may begin rising.

Also, Moody's saw conduit loan underwriting standards continue to decline in the first quarter, with loan-to-value touching a new high of 110.6%, from about 90% in the first quarter of 2003.

And loans with an interest-only period also touched a high of over 84% in the first quarter.

Moody's expects that CMBS credit metrics may even decline further before stabilizing.

Even then, the rating agency doesn't expect that the level of commercial mortgage delinquencies will be as bad as the recent level of subprime delinquencies.

Jay Epstien, Washington-based chair of law firm DLA Piper's real estate practice group, also believes that the market maybe getting close to the top.

Respondents to a recent survey on the state of the real estate market by the law firm were more optimistic than might have been expected, according to him.

Over 75% of the respondents have a bullish outlook for the U.S. commercial real estate market for the next 12 months.

According to DLA Piper, this is based on "a broader comfort level with commercial real estate investments built upon the perception that there is an overabundance of capital, cheap debt and a near insatiable desire to deploy this capital quickly."

Mr. Epstien noted that this is a cyclical business and can't always go up. The question is "when it reaches a peak, how far down will the valley be?"

Consequently, he thinks there may be a slowing down, but not in the strongest markets such as Washington and New York.

If job growth slows, there may be a shift in demand, but even then there is an abundant supply of capital coming in.

As for the multifamily market, Hollis Leon, EVP, production management, ARCS Commercial Mortgage, Calabasas, Calif., believes that its performance has not peaked yet.

The market is "extremely strong," with "stupendous demographics," according to her.

She believes that in terms of lending parameters the most aggressive practices are past in this market.

Multifamily occupancies continue strong, as does rent growth, and there is a tenant base made up of "echo boomers" and immigrants.

Besides, a lot of people still can't afford to purchase and fence sitters are going to continue sitting on the fence as long as the housing market turmoil continues, as she sees it. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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