S&P: CMBS Delinquency Rate Jumped 224 Percent in ’08

bear ucumari S&P: CMBS Delinquency Rate Jumped 224 Percent in 08Standard & Poor’s just released its end-of-year CMBS report, the oh-so-optimistically titled “Further CMBS Credit Deterioration Expected in 2009.”

Here are some of the report’s major conclusions, in brief:

  • After climbing steadily for six consecutive quarters from a low of 0.27 percent at March 2007, delinquencies among rated commercial mortgage-backed securities (CMBS) escalated in the fourth quarter of 2008, ending the year at 1.10 percent. The dollar amount delinquent was $6.86 billion at the close of 2008, easily distancing itself from the $3.98 billion delinquent at December 2003, which was the previous peak for CMBS delinquencies.
  • Given the 7.6 percent January 2009 unemployment rate, which we expect to reach 9 percent in early 2010, constrained liquidity, and the expected sharp decline in property fundamentals, we believe the CMBS delinquency rate could climb to 3.0 percent to 3.5 percent in 2009.
  • The CMBS delinquency rate accelerated briskly last year, albeit off a relatively low base, and finished 2008 224 percent higher on a year-over-year basis. When you consider that the recession started in December 2007, according to the National Bureau of Economic Research (NBER), the increase isn’t all that surprising. For comparative purposes, delinquencies in the first full year following the start of the previous recession (March 2001 to March 2002) grew by 71 percent.

S&P reports that the hotel subsector was hardest hit, with delinquencies increasing to"$874.1 million from $300.4 million in the fourth quarter, representing a 191% quarterly increase–the largest for the year and for all property type. For 2008, the amount delinquent increased by 375%."

But the retail subsector wasn’t much of a winner, either, with delinquencies increasing "to $1.90 billion from $803.8 million, representing a quarterly increase of 137% and an annual increase of 318%. With retailers closing stores and filing for bankruptcy, retail loan delinquencies are increasing."

As far as office delinquencies are concerned, the picture isn’t as dreary, at least not yet:

Office delinquencies surpassed the $1.0 billion threshold in 2008, ending the year with $1.10 billion delinquent and a delinquency rate of 0.59%. Even though office delinquencies almost doubled in the fourth quarter, the sector’s current delinquency rate is the lowest of the major property types. We believe that an absence of large delinquent office loans has helped keep the office delinquency rate low. At this juncture, we do not expect office vacancy rates to reach 1990 levels. This reflects the significant amount of oversupply that existed for this sector at that time. However, office vacancy rates could reach 2000 levels, as rising unemployment rates through early 2010 could drive vacancy rates higher than their current levels. We expect office delinquencies to increase in 2009, as sublease space generates excess inventory and concessions/lease renegotiations pressure operating cash flow. In 2010, the office sector could also be challenged, as five-year leases signed in 2005 roll from a large 2005 vintage year (20% of total CMBS office population). REIS Inc. reported that the national office vacancy rate increased by 80 basis points in the fourth quarter to 14.5%. This is the largest one-quarter increase in office vacancies since the second quarter of 2001. Effective rent growth declined by 1.6% in the quarter.

On the upside, the analysts over at S&P don’t expect delinquincies, particularly in the office subsector, to rise to the levels of the early ’90s, thanks to the comparative lack of over-supply.