CMBS Delinquency Rate Not Likely to Peak Until 2011

Despite an improving economy, Standard &Poor’s expects delinquencies on loans backing commercial mortgage-backed securities to keep rising until job numbers meaningfully improve and employers feel confident that a recovery is firmly underway.

“In 2010, we expect higher vacancies and lower rents to continue to fuel delinquencies, especially for underperforming properties,” S&P says in its latestCMBS Quarterly Insights. (Premium)

Selected excerpts:

We expect the delinquency rate to reach 7%-8% of the outstanding principal balance of U.S. CMBS in 2010—up from 1.10% at the beginning of 2009 and 5.15% at year-end—before peaking in 2011.

In the previous recession, which lasted from March 2001 through November 2001, delinquencies among Standard & Poor’s Ratings Services’ rated CMBS peaked at 1.96% in December 2003, approximately 25 months after the recession ended. And in the prior recession, spanning from July 1990 to March 1991, the delinquencies peaked at 7.53% in June 1992, 15 months after the recession’s end, according to data from the American Council of Life Underwriters (ACLI) on commercial mortgage delinquencies.

In addition to the impact of higher vacancies and lower rents, our delinquency forecast also considered the following factors:

• We’ve observed that default probabilities are generally highest during the third through fifth years of a loan’s life, which indicates that loans in the 2006-2008 vintages are now in their peak default periods.
• $28.6 billion of loans mature in 2010, approximately double last year’s $14.4 billion, although increasing use of loan extensions could mitigate maturity defaults this year.
• The largest concentration of CMBS loans (15% of the total outstanding balance) is in California, which Standard & Poor’s recently downgraded to ‘A-’, the lowest general obligation rating for any U.S. state.