CMBS Delinquencies May Grow 58% in the Next Six Months, Realpoint Says
The delinquent unpaid balance for commercial mortgage-backed securities (CMBS) rose "substantially" in November - more than 16% - to $37.93bn from the previous month, and the rate of growth looks likely to continue, according to monthly research by credit-rating agency Realpoint. The news comes as investment firm Grubb & Ellis (GBE), predicts a slow commercial real estate market in 2010. Multifamily loans surpassed retail loans in November as the largest contributor to overall CMBS delinquency, Realpoint said. The sector accounted for 1.23% of the CMBS universe, but 26% of total delinquency. The overall delinquent unpaid balance of CMBS rose "an astounding" 440% from one year earlier, when $7.03bn of unpaid balance was delinquent in November 2008. Realpoint indicates the rate of growth in delinquency looks unlikely to let up as the market heads into 2010. "Overall, following the delinquency reporting of the $4.1bn Extended Stay Hotel loan and the experienced average growth month-over-month, we now project the delinquent unpaid CMBS balance to continue along its current trend and grow to between $50bn and $60bn by mid 2010," Realpoint researchers wrote in the December 2009 report. With these figures, Realpoint expects delinquent CMBS to grow as much as 31-58% by mid-2010. Additionally, Realpoint researchers project the delinquency percentage to grow between 5% and 6% through Q110, potentially surpassing the 7-8% mark under heavy stress scenarios through mid-2010. Researchers made these projections under two sets of statistics. In one scenario, they based projections on the average delinquency growth of $3.19bn of principal balance per month for the last six months. In the other scenario, researchers used the average $3.3bn monthly growth of delinquent principal balance over the last three months. In either scenario, they also calculated in the potential default of the specially-serviced $3bn Peter Cooper Village/Stuyvesant Town loan. The industry remains bearish on CMBS performance, but other aspects of the broader commercial real estate (CRE) industry may improve in the new year, affecting a brighter outlook for CRE as a whole. CRE investment transaction volume, for example, is poised to grow in 2010 as lenders and servicers begin working through distressed assets and bringing them to market, according to research released Monday by real estate services and investment firm Grubb & Ellis. As CMBS servicers, banks and lenders begin working through these assets, sales volume should increase 20 to 30% over 2009's "artificially low levels." While other CRE fundamentals will continue their decline in 2010, the rate will be slower than 2009's free-fall. Grubb & Ellis economists also anticipate a slow recovery of the CRE industry as a whole to begin in 2011. “Many have called commercial real estate ‘the next shoe to drop,’ but that’s really an exaggeration,” said Bob Bach, senior vice president and chief economist at Grubb & Ellis. “It implies that commercial real estate could wreak damage on the financial system equivalent to the subprime residential mortgage losses, which is highly unlikely because the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages." Bach added: "Nevertheless, losses will mount over the next several years. If banks aren’t lending because they’re coping with losses in their real estate portfolios, this could impede the economic recovery.” The national office market vacancy rate is expected to reach 18.5 to 19% by year-end. Grubb & Ellis also noted that growth in the multifamily housing market is dependent on job growth, as the market suffered in 2009 when recent college graduates had trouble finding employment out of school. In the long term, apartment rentals should benefit by the growing wave of residential foreclosures -- a plus for CRE, but a bad sign for the residential mortgage market. Write to Diana Golobay.