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Stories about commercial lending on multifamily, office, retail and industrial properties.

Problems Ahead for 2007 CMBS, Industrial Properties

Reports warn about balloons in 2012

Dec. 19, 2011

By staff

Securitized commercial real estate loans backed by industrial properties are showing deterioration as operating statistics continue to worsen. But the more immediate concern is the 2007 vintage of all CRE loans as a wave of maturing five-year balloons hits next year and little prospect is being held out for refinancing more than half of them.

Quarterly delinquency on commercial mortgages that are secured by industrial properties reached a 22-year high.

Third-quarter delinquency on industrial property loans 12.05 percent, according to Standard & Poor's Ratings Services.

While the industrial loan sector had long been considered one of the more stable commercial mortgage-backed securities asset classes, the segment is the only major CMBS property type with delinquencies sitting at historical highs based on data back to 1990.

S&P said that CMBS industrial collateral performance has been weak for the past several years. Operating income in the sector has declined on 47 percent of properties backing CMBS, and half of the loans have seen decreases in excess of 20 percent.

"With industrial vacancy rates at historical highs and rents remaining stagnant or falling, we don't expect much near-term improvement in net operating income at the property level, and it could even decline for certain properties and markets," S&P Credit Analyst Larry Kay said in the report.

A separate report from S&P warned that more than half of CMBS loans originated in 2007 and scheduled to mature next year will not be able to refinance.

Out of $55 billion in CMBS loans estimated to mature in 2012, $19 billion were originated in 2007. Of the 2007, vintage -- 85 percent are scheduled to mature in the first-half 2012.

The first report on industrial properties indicated that $2.4 billion in securitized industrial loans are scheduled to mature next year.

"The retrenchment in the capital markets and among other lenders in the third quarter of 2011, which has continued into the current quarter, dims the refinancing prospects for loans maturing next year," S&P stated.

The ratings agency projects that only 40 percent to half of next year's maturing balloon loans will refinance.

But not all of the loans will default, with maturity extensions expected to continue at "a healthy rate."

S&P forecasts that delinquency will be between 9.50 percent and 10.00 percent during 2012. The forecast would have been worse except that a modest improvement is expected in property fundamentals and collateral performance.

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