Commercial Overdues Are Up, But Not as Much as Expected
War, what is it good for? Now that the war in Iraq has ended quickly, resulting in oil prices going down, fears about the possible impact of a long, drawn-out war on the economy have also been allayed. The Federal Open Market Committee has cited this factor in its May 6 decision to keep interest rates unchanged at their current lows. According to the FOMC, "the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets." They also expect these developments to "foster an improving economic climate over time."
At this point, in what might well be close to the bottom of the current economic downturn, commercial mortgage delinquencies have not risen to the high levels some forecasters were expecting.
Even then, the rating agencies have seen a rise in delinquency levels for the first quarter and remain cautious about the rest of 2003.
Moody's sees "early signs of a bottoming-out process" for commercial property markets in its first-quarter CMBS report. The rating agency believes however that "delinquencies may still have some room to rise over the next few quarters as the economy and demand for real estate space remain soft." Through late 1999, the performance of all the asset classes were linked closely, Moody's says, with a spread of 1% or less on their delinquency rates. The rating agency is now seeing a trend of delinquency rates for health care and lodging properties separate and rise much higher from the rates for the "core" property types of multifamily, retail, industrial and office. For the major asset categories, there has been a steady rise in delinquency rates over the past few years that Moody's expects "still has a few more quarters to run until all of the lagging factors from the downturn have worked their way through the system."
Fitch Ratings has also seen a more than 14% rise in commercial mortgage-backed securities delinquencies in the first quarter over the last quarter of 2002. (See related story, page 26.)
Standard & Poor's also reports that delinquency rates on the CMBS deals it rates rose to 1.56% for the first quarter, up 0.05% from the last quarter of 2002. In dollar terms, the $2.87 billion in delinquencies represents a 15% rise in the amount of delinquent loans over the last quarter, the rating agency says.
Multifamily properties saw a 0.08% decline in delinquency to 0.71% which is surprising considering, as S&P points out, that vacancy rates are "at their highest level in a decade."
Delinquencies on retail properties also declined, going down 0.04% from the previous quarter. Delinquencies on health care-backed CMBS decreased to 7.33%, from 8.22% at the end of 2002. This is the lowest health care delinquency rate that S&P has recorded. However, S&P believes that "CMBS healthcare is not out of the woods yet when it comes to losses." Lodging delinquencies jumped to 7.9% at the end of the first quarter, which is the highest S&P has seen, with an amount delinquent of $1.19 billion. Of course, this sector has been particularly impacted by the war. The office sector has held up well, with a delinquency rate of 0.7% for the period, the lowest of all the property classes tracked by S&P.
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