Commercial Real Estate Direct Staff Report

Another $1.2 billion of securitized commercial mortgages became delinquent last month, pushing the volume of delinquent CMBS loans to $12 billion, according to Realpoint. That's an increase of 246 percent from a year ago, when $3.46 billion of loans were delinquent.

Meanwhile, the universe of CMBS has continued to shrink, to $837.8 billion from $842.8 billion. That has resulted in a disproportionate increase in the delinquency rate, to 1.43 percent from 1.28 percent in January.

Realpoint projects that the volume of delinquency could climb close to $40 billion by the end of the year. That's based on the assumption that about $1.65 billion of loans - the average for the past three months - would sour every month and that two very large troubled loans, the $3 billion financing on Manhattan's Stuyvesant Town/Peter Cooper Village property and the $4.1 billion loan on the Extended Stay Hotel portfolio, formally became delinquent. While the StuyTown/Cooper Village property doesn't generate anywhere near enough cash flow to fully service its debt, it still has reserves that could run through early next year. But the Extended Stay debt could be in technical default when it begins amortizing in June as part of its extension.

The growth in delinquency was driven by a sharp rise, to $4.29 billion from $3.12 billion in the volume of loans that are more than 90-days late. Loans in foreclosure climbed to $1.35 billion from $1.05 billion. Other delinquency categories were either flat or shrank slightly. Under more normal market circumstances, that would be viewed as a positive. But the volume of loans in special servicing has continued shooting up, to $17.1 billion in February from $14.4 billion a month earlier, indicating troubles are very likely to continue. The February figure of $17.1 billion is up slightly from what was previously reported and is explained by anomalies in the timing of trustee reports.

The most troublesome loans are those originated in recent years, when the market was at its frothiest. Indeed, loans securitized between 2005 and 2007 accounted for 67 percent of total delinquency.

As loans sour and run up the delinquency ladder to foreclosure, special servicers are mandated to workout and ultimately resolve them. Under more hospitable market conditions, special servicers are more readily able to sell either loans or their underlying properties.

But with capital markets still cramped, the volume of liquidations has fallen, to $53.9 million in February from $127.5 million a month earlier. And about $19 million of the latest months' liquidations were resolved at little loss, indicating those loans, which largely were originated in 1999 and presumably had matured, finally had been refinanced. The remaining $34.8 million of liquidations saw an average loss of 46.1 percent - an average that was pulled down by the relatively tiny 2.1 percent loss on a $1.4 million loan on a Bronx, N.Y., retail property. The loan had matured last December, prompting its move to special servicing. It was ultimately paid off.

Realpoint said it expects loss severities to climb, possibly sharply, given the dearth of financing available for buyers of collateral properties or distressed loans. Last year, for instance, a total of $1.3 billion of loans was liquidated at a loss of 24.9 percent. So far this year, $181.4 million of loans have been liquidated at a loss of 31.2 percent. But if you exclude loans that were resolved at nominal losses, indicating they were ultimately paid off or refinanced, the severity jumps to 54.4 percent.

While much attention has centered on the retail and hotel sectors, which generally suffer disproportionately in a consumer-driven recession, the multifamily sector has so far been the worst performer. A total of $4.3 billion of multifamily loans are now delinquent. That's 2.57 percent of all securitized multifamily loans. Retail is just behind, in volume, with $3.66 billion of delinquency, meaning 1.57 percent of all retail loans are delinquent.

The hotel sector has a relatively benign 1.79 percent delinquency rate, but that's a mammoth increase from just last October when its delinquency rate was 0.5 percent. And the expectation is that the sector will suffer from a prolonged decline in revenue per available room, a widely used industry metric. What's more, some $2.6 billion of hotel loans start amortizing this year, according to RBS Greenwich Capital Markets. The added debt-service burden will undoubtedly plunge certain marginally performing properties into delinquency.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.