Moody's Says Small Town Blues Affect CMBS Deals

The smaller the town, the greater the chance a commercial mortgage loan will become delinquent, according to a Moody's Investors Service study of commercial mortgage-backed securities.

In fact, Moody's found that loans from towns too small to be part of a Metropolitan Statistical Area were more than five times as likely to become delinquent as loans from the large cities.

For example, the 10 largest cities had a delinquency rate of 0.7%, while towns too small for MSA classification had an average delinquency rate of 3.8%, according to Moody's.

However, because the commercial mortgage loans from small towns are smaller than ones from larger metro areas, the dollar amount of delinquent CMBS from small towns, at $263.2 million, was smaller than the $537.9 million in delinquent CMBS loans from major cities.

"This pattern prevails across all property types," said Moody's analyst Sally Gordon, author of the report.

Moody's says that about 1.3% of loans, by dollar value, that underlying CMBS transactions are delinquent.

There is a clustering of above-average delinquencies in the industrial Heartland states of Illinois, Michigan and Ohio, including areas that are home to automobile manufacturing and related industries. Also, Louisiana, South Carolina and Florida have above average delinquencies.

Specifically, all of the Heartland and most of the South is marked as underperforming, as well as Texas and Arizona. In the West, New Mexico, Utah and Oregon are overrepresented among delinquencies, Ms. Gordon said.

The report corroborated the belief that real estate trends lag the rest of the economy, and those lags are apparent in the delinquency profile.

"Hotels generally, and cities and states heavily concentrated in auto industries, are already showing the effects of stress in those areas. Technology and telecommunications do not show similar stress yet," Ms. Gordon said.

The report is part of a new Moody's delinquency index for measuring the relative performance of any CMBS sector, such as retail, or an empirical category, such as defaults by states.

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