CMBS Loan Defaults On the Up
Defaults on commercial real estate loans are rising according to Fitch Ratings, at least in the case where such loans are linked to commercial mortgage-backed securities (CMBS). What's more, the defaults are concentrated to certain states in America, highlighting a trend of geographically related performance. Michigan is seeing the highest proportion of loans currently in default for any state, with 6.89% of all loans at least 60 days delinquent or in foreclosure, according to Fitch. 100 commercial loans in the state fit into this category at a total $501m. The average rate of default among the hardest hit states increased 25bps to 1.78%, according to the rating agency's monthly CMBS loan delinquency index. "Emerging trends suggest that collateral located in states facing the bleakest economic conditions are seeing systemic declines in occupancy and net operating income, which have pushed property valuations lower and loan default rates higher," says Fitch's head of US CMBS Susan Merrick. "Maturity defaults represent a diminishing proportion of the index at 8.3%, while performance defaults continue to rise." Rates of defaults remain comparatively high in Tennessee (6.57%), Ohio (4.34%), Indiana (4%) and Rhode Island (3.76%). While the loans secured by properties located in the worst performing states account for less than 6% of the Fitch-rated universe by balance, they make up nearly one-fourth of all real estate owned (REO) loans tracked in the index - an indication that special servicers are finding limited opportunities to work out or to quickly dispose of assets in these locations. Fitch's delinquency index includes 1,432 delinquent loans totaling $8.5bn. The credit rating agency tracks the performance of a total of 43,000 commercial loans, totaling $479bn. The performance of CMBS usually lags behind the performance of residential real estate. Fitch's index suggests CMBS might continue to decline for some time, despite signs the residential market may be seeing a bottom. For in-depth coverage of commercial real estate, see the July issue of HousingWire magazine. Write to Jacob Gaffney.