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CMBS Delinquency Rate Plummets

Devastation Caused by Hurricane Sandy a Big 'If' in Coming Months
November 7, 2012
After dropping below the 10% mark in September, Trepp projected that the CMBS delinquency rate should continue to see considerable downward pressure in the months to come. That was certainly the case in October, as the rate saw its biggest drop in 14 months. The delinquency rate for U.S. commercial real estate loans in CMBS fell 30 basis points to 9.69% in October.


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At the same time, Fitch Ratings said CMBS loan defaults, including in CMBS 2.0, could rise as early as the November 2012 distribution date following the impact of superstorm Sandy, although the ratings agency said it is much too soon to accurately assess the full effect of the storm and said many of the loan defaults could simoly be the result of temporary power and connectivity issues.

However, it may take some time to resolve these loans if borrowers with property damage experience delays in receiving insurance proceeds, making repairs and resuming operations.

Loan resolutions remained high in October, according to Trepp. More than $1.5 billion in loans were resolved in October with losses. The removal of these loans from the delinquent loan category accounted for 28 basis points of downward pressure on the delinquency rate.

Loans that were newly delinquent-around $2.6 billion in total-put upward pressure of about 46 basis points on the rate, according to Trepp. This was significantly less than September's $3.3 billion of newly delinquent loans that contributed 59 basis points of upward pressure. Loans that cured in October put downward pressure of 45 basis points on the rate, essentially offsetting the amount of loans that became delinquent.

Added together, the impact of the loan resolutions, the effect of loans curing, and the effect of newly delinquent loans created a net improvement of 27 basis points in the rate. The remaining three basis points were a result of the repayment of performing loans, loans becoming defeased, the amortization of existing loans, and the addition of new deals to the pool.

Among the major property types, only the multifamily segment weakened in October. Office, retail, lodging, and industrial loans all saw improvements month-over-month.

The industrial delinquency rate shed 68 basis points and is now 11.53%. The lodging delinquency rate dropped 92 basis points to 11.24%. The multifamily delinquency rate increased 17 basis points and remains the worst major property type with a rate of 14.26%. The office delinquency rate fell 28 basis points to 10.20%. The retail delinquency rate decreased by six basis points to 8.03% and remains the best performing major property type.

The improvement may not be over yet. Trepp reported that it foresees no reason for the volume of loans being resolved each month to drop. Borrowing costs remain extremely low and the appetite for distressed real estate remains high. This should allow special servicers to continue to operate at a high speed for the foreseeable future.

Fitch Ratings does see one potential glitch from Hurricane Sandy towards continued improvement. Once storm damage status reports are received, some transactions where the impact of the storm is concentrated may be at risk of future downgrades if Fitch believes the borrowers lack the wherewithal to get the properties performing again.

However, Fitch does not expect significant rating actions as most commercial properties maintain property/casualty insurance, windstorm insurance, and 12 to 24 months of business interruption insurance, along with some properties that have certain amounts of flood insurance coverage.

Fitch said property damage is expected to be significant given the size of the affected area, from the Mid-Atlantic region, the Northeast and to the Great Lakes, as well as the geographic concentration in CMBS of these states and large cities along the Eastern Seaboard.


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