August 11, 2009 3:00 am

CMBS delinquencies add $2bn per month

The outlook for US commercial mortgages is deteriorating, with a bottom still far away for this troubled area of the economy, even as signs of improvement emerge elsewhere.

Fitch Ratings yesterday said that delinquencies for loans in US commercial mortgage backed securities (CMBS) rose by nearly half a percentage point in July to 3.04 per cent, the highest level since the rating agency began tracking this index of loans in 2001. The loans in the index represent about $480bn in CMBS, or two-thirds of the market.

At the current rate of increase of more than $2bn a month, delinquencies could top 5 per cent by the end of the year and surpass 6 per cent by the first quarter of 2010, Fitch said.

"While there are some signs of recovery in the overall economy, commercial real estate is a lagging factor and there continue to be large borrowers handing over the keys on pretty much a daily basis," said Mary MacNeill, managing director of Fitch's CMBS group.

Commercial real estate is a wild card in the recovery of the US economy and financial system. It remains unclear how distressed the market could become, presenting a potential new leg of losses for financial institutions just as they wean themselves off federal support.

Fitch's index, a measure of loans that are at least 60 days delinquent or in foreclosure, has risen from 0.28 per cent in January 2008, as the recession has reduced demand for commercial properties encompassing office buildings, retail store space, hotels and large multi-family flats. The previous peak was 1.2 per cent in August of 2004.

Aaron Bryson, a CMBS strategist at Barclays Capital, expects delinquencies could be closer to 8 per cent by the end of 2009.

To help revive the sector, the Federal Reserve has included CMBS in the term asset backed securities loan facility (TALF), where it lends investors money to buy new deals, though none have been arranged.

Investors hope to hear word on whether the Fed plans to extend TALF from its expiry in December after this week's Federal Open Market Committee meeting.

The Fed is already providing investors with loans to buy existing CMBS. In July, hotel and retail properties showed the most dramatic increases in delinquent loans, rising 41 per cent and 21 per cent, respectively.

Hotel delinquencies were $686.5m, or 17 loans, and included the Four Seasons Hotel in San Francisco.

The rise, however, did not include $4.77bn of loans that are paying debt service, but are with special servicers.

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