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Hotel CMBS Defaults Worst of All CRE: Fitch

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With hotel property values and occupancy rates on the decline, commercial mortgage-backed securities (CMBS) backed by hotel loans have a 60-day delinquency rate of 6.81%, according to recently released research by Fitch Ratings. The delinquency rate of hotel loans is the highest among all major commercial real estate (CRE) types and is nearly double the overall CMBS delinquency rate of 3.86%, Fitch said. While the overall CMBS rate is projected to peak at 12% by 2012, hotel CMBS delinquency rates are expected to exceed that, Fitch added. In October alone, 26 hotel loans worth $1.1bn became newly delinquent. Cash flows are expected to decline 35% from peak levels and cash flow volatility is a big issue for the sector. Hotel reserve funds are taking a hit because even when there are occupants in the hotels, its generally at lower than normal rates, contributing to increased delinquencies and defaults. Lowered property values, particularly at resort and luxury facilities, is further hurting CMBS performance. Fitch estimates property values will decline as much as 50% from peak levels and the volume of loans transferred to a special servicer increased 300% since the beginning of 2009. Liquidity issues for lodging-based real estate investment trusts (REITs) are also affecting the increase in hotel CMBS delinquencies. REITs are finding it difficult to secure funds to refinance maturing debt. Fitch analysts said new CMBS deals for luxury and resort hotels will remain virtually non-existent and other hotel-backed CMBS will be limited in volume. Consumer demand for timeshares is also low, and the sector’s experienced noticeable deterioration in delinquency and default performance. Virtually all defaults to date have been repurchased by the transactions’ respective seller/servicers, Fitch added. The research comes as CMBS and commercial mortgage information provider Trepp indicated hotel delinquencies led the lodging sector up to 14% delinquent in November. Write to Austin Kilgore.

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