CMBS delinquency rate drop brings cautious optimism

Posted on 31. Oct, 2010 by Colby Hamilton in Uncategorized

The commercial real estate market this week received good news. The numbers are out, showing an overall drop last month in commercial mortgage-backed securities delinquency rates for the first time in over a year. Nationally, the percentage of delinquencies past the 30-day mark fell to 8.58 in October, down from 9.05 the month before. The rate improvement was led by the resolution of the Extended Stay Hotels loan delinquency.

New York City delinquency rates, based on data provided by Trepp. Excludes the Stuyvesant Town loan.

The raw numbers for New York City showed a general continuation of last month’s improvement from August, giving fodder to bullish brokers and owners who believe the market has bottomed out. More importantly, the national delinquency rate drop this year will likely be an anomaly, as delinquencies are expected to trend upwards as loan rate resets begin piling on in 2011 and 2012. This will likely make the relative oasis of stability that is New York City, with its lower unemployment average and improving commercial leasing situation, a greater target for investors.

“New York is a prime geographical market with a strong and diverse economy that possesses desirable assets so the delinquency rate will always be below the national average,” said Paul Mancuso, a vice president with Trepp wrote in an email. “Any upward movement in the delinquency rate will because of the sheer loan size of ‘trophy’ loans originated in New York and not an overall fundamental trend of the area.”

Based on Trepp’s data, New York City’s overall delinquency rate moved from 7.14 percent in September to 7.15 percent in October. The largest area of increase came in the retail sector, which grew from 2.03 percent to 2.42 percent. But Mancuso noted this was the result of loans amortizing down, not new delinquencies in the city. Likewise, as Stuyvesant Town comes off the books, the overall rate falls drastically to less than half the national average at 3.12 percent in October.

There remains, however, a hesitation to declare the threat of delinquencies over. Steve Roberts, a senior managing director at Grubb & Ellis, said he saw the large property delinquencies as distortions. “The real question is going to be how many more loans are going to default that are in the mid range,” he said. “Until the economy gets a little bit stronger, I actually would think the default rates are going to climb back up.”

“As a lender at Citigroup for quite a number of years, we were making—as was everyone in the industry—very aggressive loans,” Roberts said. “As these loans mature, there is very limited ability that those loans will be able to refinance.”

The primary focus of this concern, according to Fitch Ratings’s managing director Mary MacNeill, was in the office market. While the unemployment rate in the city remains below the national average, anemic growth could spell trouble, especially for leases signed at the height of the market in 2006 and 2007.  “The office market—we’re still cautious about that, even in New York,” she said.

Even if delinquencies remain a concern, MacNeill saw new mortgage issuances as an unqualified bright spot. With the implementation of more conservative lending practices, the market for CMBS will remain strong. “As long as that practice continues,” she said, “there’ll be interest in CMBS.”