In two reports on the state of the commercial mortgage backed securitization markets (CMBS), two rating agencies monitoring bond performance say the market is showing weakness — a trend that will likely continue for the rest of the year. Fitch Ratings saw office defaults push the overall CMBS delinquency rate to 7.97% in May, as Moody’s Investors Service saw a 48-bps hike in CMBS delinquency to 7.5% in May: “As expected, office loan delinquencies have begun to increase and will continue to rise well into next year,” said Fitch managing director Mary MacNeill. “Landlords are facing tenant downsizing and in many cases must offer significant concessions and reduced rent to maintain their existing tenant bases.” Moody’s now says it expects the delinquency rate to end 2010 in the 9%-11% range, an increase from the previous expectation of 8%-9%. Indications of the fragile nature of the recovery in the US, with stubbornly high unemployment, along with ongoing difficult conditions for some CMBS sectors and the possibility of negative effects on the US economy from the sovereign debt problems in Europe, have led to Moody’s slightly more negative view. While commercial mortgage performance is likely to continue correcting at least in the near-term, Fitch noted a relatively low leverage ratio working in favor of the recent JP Morgan CMBS deal, only the second of this year. The rating agency said the deal bears a low leverage relative to 2007-2008 conduit transactions. The stressed coverage and loan-to-value (LTV) are 1.37x and 78.2%, respectively. This compares favorably, Fitch said in its pre-sale report, with 1.05x and 110.7% across Fitch-rated conduit transactions in 2007-2008. Lisa Pendergast, managing director of CMBS strategy and risk for Jeffries & Co. and incoming CRE Finance Council president noted that, while the recent deals were welcomed by the industry, they were not immediately seen as the precursor to CMBS revival. “Unlike first half of 2009 when you didn’t have folks willing to lend, now they’re willing to lend, if only for the very best properties,” she told Retail Traffic, adding that recent deals are “positive steps” for the industry. “A big part of seeing new CMBS issues is going to be more properties trading hands and those that are maturing getting refinanced,” CRE Finance Council president Pat Sargent told GlobeSt. Write to Diana Golobay. Additional reporting by Jacob Gaffney.
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