Delinquency Rates Fall for all Asset Classes
Delinquencies on commercial mortgage-backed securities have declined simultaneously across all of the four major property types for the first time in several years, Fitch Ratings reports. The rating agency's U.S. CMBS loan delinquency index reading for February has gone down four basis points to 1.23%. This, following on the heels of a decline to 1.27% in the Fitch index for last December, would appear to bear out the view that commercial mortgage delinquencies are not going to climb any further in this economic cycle.
Mary O'Rourke, senior director, Fitch Ratings believes that the declines are likely to have come about as a result of the resolution of real estate-owned properties. She sees it as a significant development that the declines in delinquency occurred across multifamily, office, retail and industrial property-backed loans. However, hotel loan delinquencies, which have "improved steadily" over the past year, have increased 3.6% in the current Fitch delinquency reading.
Fitch Ratings also reports that only 4.4% of the cumulative issuance of CMBS securities since 1993 has defaulted. The overall cumulative default rate of CMBS loans grew by 62 basis points in 2004, which Fitch says is the smallest annual gain since the rating agency started publishing its CMBS default studies. Overall, 2004 was a better year for CMBS collateral than 2003, according to Fitch, considering that there were 153 fewer loan defaults in 2004. However, not all CMBS vintages have held up so well.
Ms. O'Rourke notes, "The 1995, 1996 and 1997 vintages have exceeded the Fitch expected cumulative vintage default rate, and Fitch believes it is likely that the 2000 vintage may also exceed the 10% threshold by the time it experiences 10 years of seasoning." The CMBS 2000 vintage, much of which is backed by collateral that was "aggressively underwritten during peak market conditions," has already experienced a 6% default rate, Fitch reports. The rating agency is also observing the performance of the 2001 vintage with caution.
Multifamily is the only major property type that saw an increase in the amount of defaults for 2004, Fitch said. The dollar amount of multifamily loan defaults rose by 43% over 2003 defaults. Retail loan defaults declined by more than half in 2004 compared to 2003. Ms. O'Rourke said, "By contrast, the office sector, which was late in experiencing defaults as a result of the earlier recession, is still at an earlier stage of recovery. There was only a slight decline in the number of office loans that defaulted in 2004 compared to 2003."
The lodging industry turned in the "most improved performance" in 2004, showing substantial gains after almost three full years of "steadily declining performance," according to Fitch.
Another default study from Moody's Investors Service bears out the intuition that the particular real estate market in which a building is located is a significant factor in the performance of a commercial mortgage loan.
Sally Gordon, the Moody's vice president/analyst who conducted the study, notes, "In the office sector, the difference in performance between a pool of loans dominated by weak markets compared to a pool of loans largely comprised of strong markets is significant - often by a factor of two, for potential default."
In the multifamily sector, however, the market factor does not loom so large, which the rating agency believes could be a result of the property type's "more favorable position in its credit cycle at this time" which means that the multifamily sector in general is strong and properties in weak markets do not lag those in strong ones performancewise "by as much of a margin as in the office sector."
The study finds that the difference between property types is also marked, with even weak apartment markets expected to outperform strong office markets. For both property types, the probability of default peaks about four years after origination. But Moody's found that the estimated level of cumulative defaults varies widely for the two property types, with office markets ranging from a low 3.6% in cumulative defaults in the Seattle market, over a 10-year period, to a high of 55.3% in San Francisco. For apartment markets, the range extends from a low of 4.3% in cumulative defaults for Austin, Texas, to a high of 18.8% for the Oakland, Calif., market. And only three multifamily markets were found to have a cumulative default rate greater than 10%, while many office markets were found to have double-digit default rates.
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