Commercial Real Estate Direct Staff Report

The volume of delinquent CMBS loans continued to climb in October, hitting $32.55 billion, but the pace of increase slowed substantially from earlier months, according to Realpoint.

The slowdown is likely an anomaly, as the belief is that real estate conditions are not yet in their trough and many property owners continue to face challenges refinancing maturing mortgages.

"We've definitely not yet hit bottom," said Frank Innaurato, managing director of the Horsham, Pa., rating agency. Indeed, Realpoint projects that the delinquency rate, now at 4.013 percent, up from 3.94 percent in September, will continue to climb and possibly hit 6 percent some time in the first quarter.

The data set that Realpoint uses to determine delinquency trends totals $810.9 billion of CMBS loans. Some were securitized through transactions issued and guaranteed by either Fannie Mae or Freddie Mac and others through Canadian transactions, which tend to have far lower delinquency rates than conventional CMBS issued in the U.S.

If you take out agency deals from the data, the delinquency rate is 4.18 percent. And if you count only conduit transactions, the delinquency rate is 4.42 percent.

The 2.58 percent increase in delinquency between October and September, when the volume of delinquent loans totaled $31.73 billion, compares with an average monthly increase of 16.9 percent over the past 12 months. That average excludes the 53 percent increase logged in June, when a slew of loans on properties owned by General Growth Properties had been temporarily classified as delinquent.

Changes in the volume of delinquent loans promise to stay relatively volatile, Innaurato said, because borrowers are increasingly able to make their loans performing again after being one or two months delinquent. And loans continue to be moved to special servicing in large numbers.

The volume of loans that are more than 30-days late grew to $7.19 billion in October from $7.08 billion a month earlier. That category of delinquency often had been excluded by analysts because of its volatility, but increasingly they're looking at it as an early-warning sign.

Meanwhile, the 60-day category saw a 33.5 percent drop in volume to $3.3 billion, but that was offset by increases in every other delinquency category.

Loans that are more than 90-days late grew by 8.6 percent to $14.51 billion. Those in foreclosure grew by 19.3 percent to $4.83 billion and those that are now real estate-owned grew by 19.4 percent to $2.71 billion.

Loans securitized between 2005 and 2007 represent 75 percent of all delinquent loans. That's not surprising since those years mark the inflation of the market's bubble, when the glut of available capital caused a massive escalation of property values.

Securitized hotel loans have the highest delinquency rate, at 7.37 percent, which represents a 28 percent increase from their 5.8 percent rate in September. They're followed by apartment loans, which have a 5.49 percent rate, and retail, with a 4.05 percent rate. Office loans have a 2.58 percent rate and industrial loans a 2.78 percent rate.

October saw the liquidation of 40 loans with a balance of $186 million. Eleven of those loans, with a balance of $45.2 million, were resolved at little loss, indicating most had finally refinanced or were otherwise taken out.

The remaining 29 loans were resolved at an average loss of 71.3 percent - far higher than in recent months. That's due to 13 loans, with a balance of $71 million that were resolved at losses of at least 80 percent. The largest of those is a $24.2 million mortgage, securitized through GMAC Commercial Mortgage Securities Inc., 2005-C1, backed by the Two Detroit Center parking garage, a 1,007-space facility that adjoins the Comerica Tower, which is about 55 percent occupied. The parking garage was sold for about $7 million, resulting in an aggregate loss of $21 million, for a loss severity of 87 percent.

In addition, a $17 million mortgage, securitized through LB-UBS Commercial Mortgage Trust, 2001-C2, and backed by the Occidental Center, a 543,572-square-foot office building in Tulsa, Okla., was liquidated at a 100 percent loss. The building, which is 73 percent occupied, did not generate sufficient revenue to cover its expenses, let alone its debt-service requirement.

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