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Fitch Sees Record Volatility in Commercial Real Estate

Cash flow in commercial real estate reached a record high level of volatility in 2008, according to a report by Fitch Ratings. In its latest annual US Property Market Metric (PMM) update report, the rating agency noted higher regional market volatility across all major sector types. In 2008, Fitch saw the highest average cash flow volatility score and the largest year-over year increase since the inception of the PMM scores in 2000. Fitch assigned commercial real estate a new average cash flow volatility score of 3.62 in 2008 from 2.98 in 2007. “While the increase in cash flow volatility was expected, what is noteworthy is the size of the increase since historic changes in PMM scores are generally small,” said managing director Bob Vrchota. “With over 50% of the PMM scores showing greater volatility compared to just 10% in previous years, the magnitude of change reflects challenging forecasts for all commercial real estate property types across all US markets.” The ratings agency noted that 47.1% of the commercial real estate volatility scores remained unchanged in 2008, while 0.4% improved and 52.5% showed greater volatilit. In 2007, by comparison, 82% of the scores had not changed while 8% improved and only 10% showed greater volatility. While higher PMM scores do not herald immediate rating actions on commercial mortgage-backed securities, they indicate a particular property type’s volatility in a specific market. The multifamily sector worsened for the second consecutive year, with the average volatility score rising to 3.15 from 2.5 a year earlier as rising multifamily loan defaults represented 33% of all 2008 loan defaults in Fitch-rated deals. “On the positive side, US CMBS multi-borrower transactions benefit from property type and geographic diversity so more volatile PMM scores in and of themselves will not result in rating actions,” Vrchota said. “However, the rise in volatility is another indicator of the challenges facing commercial real estate.” Write to Diana Golobay.

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