CMBS Overdue Rates Continue to Improve

The good news continues on the commercial mortgage delinquency front, with both Fitch Ratings and Standard & Poor's reporting a further decline on commercial mortgage-backed securities delinquencies. Fitch has seen the delinquencies drop to 1.07% in July from 1.10% for June, based on a delinquency index maintained by the rating agency. And S&P reports that in the second quarter the delinquency rate on S&P-rated CMBS dropped below 1%, finishing at its lowest level in almost five years.

The industrial sector especially saw a big 12% drop in delinquencies, reports Fitch, thanks to a resolution on six Green Bay, Wis., assets. "The credit quality of seasoned CMBS transactions continues to improve as delinquencies decline and distressed assets are resolved quickly," said Adam Fox, a Fitch Ratings director.

S&P analysts Roy Chun and Larry Kay expect the delinquency rate to continue going down "as CMBS issuance is projected to remain strong through year-end." (Issuance of the securities was $72.3 billion for the first half of the year, compared to $93.8 billion for all of 2004). However, the rating agency doesn't believe that the amount delinquent will go down from current levels considering that "new delinquencies are being created as quickly as old ones are being resolved."

The amount delinquent will be "greatly influenced" by the multifamily sector, which represents 33% of total delinquencies, the rating agency expects. S&P also attributes the decline in the amount delinquent at the end of the second quarter to loan resolutions. Delinquencies on multifamily-backed CMBS ended the second quarter at 1.75%, S&P reports, up 0.05% from the first quarter rate. And multifamily accounted for 47% of the second quarter's new delinquencies. On all other property types, except health care, the rating agency has seen declines in delinquency. On health care, delinquencies have "bounced around" over the past few quarters.

In a sign of improving performance for the office and multifamily sectors, which have both heavily influenced delinquencies tracked by S&P, both these sectors saw vacancies decline in the second quarter. The rating agency reports that office vacancies were down to 15.4%, from 15.9% for the first quarter, as companies demanded more office space, as might be expected in an expanding economy. Multifamily vacancies went down to 6.4%, from 6.6% in the first quarter, also pointing to the sort of increased demand for apartment living that might come about as more jobs are created and households set up as the economy continues to shake off its recent slump and move ahead.

Even though multifamily performance continues to get better, S&P reports that delinquencies on multifamily-backed CMBS continues to grow, thanks to excess supply in some markets, particularly in Texas. Also home purchase activity is going strong.

Thanks largely to its multifamily delinquencies, Texas ranks as the state with the greatest amount of delinquencies, at $596.3 million, of which multifamily delinquencies were at $346.6 million, according to the rating agency. Michigan ranked second for total multifamily delinquencies and also reported the highest overall delinquency rate of all the states.

Another impact from the recent declines in CMBS delinquencies is that S&P downgrades on CMBS deals in the second quarter hit the lowest quarterly level since the fourth quarter of 2001. The downgrade situation has also been aided by investor interest in CMBS securities, which resulted in investors throwing capital at performing as well as "underperforming and speculative" properties. There were 22 downgrades on CMBS in the second quarter, down from 43 in the first quarter, S&P reports. Last year, there was an average of 41 downgrades per quarter. There were also 153 CMBS upgrades in the first quarter, up from 99 in the last quarter of 2004. The S&P analysts expect this positive upgrade performance to continue.

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