Office Delinquencies Latest Driver of CMBS Troubles

Great article on delinquencies and Commercial Mortgage Back Securities.

"Job losses and subsequent office loan defaults, coupled with continued hotel underperformance, resulted in another monthly increase in U.S. CMBS delinquencies. And new matured balloons and past due loans secured by interests in non-traditional assets propelled U.S. commercial real estate loan CDO delinquencies past 10% for the first time, according to the latest index results from Fitch Ratings.

U.S. CMBS late-pays rose again in October, up 28 basis points to 3.86%. The office sector had the highest increase in delinquencies since September with 19.4% additional delinquencies followed by hotels, with a 16.5% increase.

Delinquency rates for all major property types were as follows:

Office: 2.29%,
Hotel: 6.81%,
Retail: 3.55%,
Multifamily: 6%, and
Industrial: 3.09%.

Office delinquencies increased $557.4 million in October 2009. Contributing to the increase were three newly delinquent loans greater than $50 million, the largest of which was 550 S. Hope St., a $165 million loan in GSMSC 2007-GG10. The loan transferred to the special servicer in August 2009 after the borrower, Maguire Properties, stated that it would no longer fund the debt service shortfalls. Cash flow from the property has not increased to the banker's underwritten expectations at issuance as lease expirations are not yielding the higher assumed rental rates.

"Though longer leases on office properties have historically mitigated sharp changes in performance, continued job losses are expected to increase pressure on the office sector," said Susan Merrick, managing director of Fitch and U.S. CMBS group head. "With the looming possibility of leases expiring on space under-utilized by companies that have downsized, office performance may not reach a trough for a few years."

However, it should be noted that even with the increase in October, the office sector has the lowest delinquency rate currently at 2.29%.

Hotel delinquencies increased $493.9 million in October. The hotel sector has the highest property type delinquency index at 6.81%, with nine delinquent loans of more than $100 million. Newly delinquent hotel loans included three related Red Roof Inns loans that had been included in the index in August. The loans, totaling $292.8 million, became 60 days late after reverting to 30 days in September.

The largest newly delinquent loan in the index is Riverton Apartments, a $225 million loan collateralized by a 1,230 unit rent-stabilized, multifamily housing project in Harlem, NY. The loan has been in special servicing since August 2008 after the borrower was unable to convert rent-stabilized units to deregulated units as quickly as projected when the loan was underwritten. The loan had been using debt service reserves to remain current.

By dollar balance, retail loans continued to lead the index with $4.9 billion of delinquent loans, stable from September. The delinquency volume for multifamily loans rose only slightly to $4 billion from $3.9 billion, while hotel loan delinquencies increased from $3 billion last month to a total of $3.5 billion in October. Loans collateralized by industrial properties ended the month with $746 million of delinquencies, a 3.8% month-over-month increase.

The Fitch commercial real estate loan CDO delinquency index for October increased to 10.8% from 8.7% last month, with non-traditional property types now representing 44% of all delinquencies, a disproportionate amount compared to the% of all collateral in CREL CDOs. Non-traditional property types, which include loans secured by interests in land, condominium conversions and construction projects, comprise only 13% of the collateral in Fitch rated CREL CDOs.

"About a third of the new delinquencies are large matured balloon loans that may be ultimately extended," said Karen Trebach, senior director of Fitch.

The largest new delinquency was a $110 million A-note secured by a portfolio of eight multifamily properties in five states. An affiliate of the asset manager assumed the loan and subsequently extended it for a year at a below market rate, which was 200 basis points lower than the coupon at origination. Without this spread reduction, the cash flow would not have been sufficient to cover debt service. Upon its newly extended maturity date, this loan defaulted.

New delinquencies secured by non-traditional property types this past month included two loans secured by interests in land and two secured by construction projects. Land loans currently comprise the largest component of the index with 32% of all delinquent loans. Approximately 40% of all land loans in the Fitch rated CREL CDO universe are now delinquent with increased delinquencies expected. Other non-traditional asset types also have high overall delinquency rates with condominium conversions at 23% and construction loans at 29%. Fitch assumes all loans secured by interests in land and other non-income producing assets experience a term default as part of its rating reviews."