Retail Loans Hold Up as Other Property Types Falter

Delinquencies increased on commercial mortgage-backed securities loans in all property types, except retail, for the second quarter, Fitch Ratings reports.

Loan balances on U.S. CMBS loans delinquent for a period of 60 days or longer rose from $2.8 billion to almost $3.4 billion in the second quarter, causing Fitch's loan delinquency index to rise to 1.62%, the rating agency said.

The Fitch index was at 1.39% at the end of the first quarter and Fitch expects it to reach 2.0% by year-end and to continue to rise in the first half of 2004.

Mary O'Rourke, senior director, Fitch Ratings, said, "While delinquent hotel and retail loans continue to dominate the index, making up 60% of the total delinquent balance, there have been substantial increases in the delinquent balances of office, industrial, and multifamily loans over the past three months."

She added that Fitch "expects loans secured by office and industrial properties to continue to demonstrate higher delinquency rates than they have experienced historically, while anticipating delinquencies in the retail sector will continue to level off over the remainder of the year unless there is another spate of large chain-store bankruptcies."

In the office sector, the delinquent loan balance grew 42% between the first and second quarters, while in the industrial sector the increase was 54% for the period, the rating agency said.

And considering that both these property sectors are continuing to experience falling rents and rising vacancies, Fitch expects that delinquency rates in these two sectors will continue to rise for the rest of 2003 and into the middle of 2004.

Delinquency balances on multifamily loans are also expected to continue to rise, but not to the extent of the increase in the office and industrial sectors.

Delinquent balances on hotel loans rose 27% to $1.27 billion at the end of the second quarter, up from $1 billion at the end of the first quarter.

Ms. O'Rourke noted, "Hotel properties typically experience their peak occupancy during the summer months, so delinquencies in loans in that property sector should hold steady through third quarter, and barring any significant national or global events that negatively impact travel, hotel delinquencies could show some improvement by yearend."

The retail sector alone bucked the rising delinquency trend, with a 6% decline on delinquent balances on retail loans to $724 million, compared to $764 million at the end of the first quarter, Fitch reports.

The rating agency's CMBS delinquency index is based on the balance of loans 60 or more days delinquent, including properties in foreclosure and real estate owned, in 380 Fitch-rated CMBS transactions.

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