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Declining CMBS Delinquency Could Turn

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The rate of delinquency on securitized commercial real estate loans improved last month. But the improvement might not last.

Commercial mortgage-backed securities outstanding tracked by Morningstar Research ended June at $740.5 billion, down from $746.9 billion at the end of May, a report Friday said.

Of the June 30 balance, $60.9 billion in securitized commercial mortgages were delinquent. The balance of delinquent CMBS loans was down from $62.4 billion in May.

But much of $1.5 billion decline from the prior month was the result of $1.3 billion in liquidations with an accompanying loss severity rate of 48 percent.

“The movement in both delinquent unpaid balance and percentage is now clearly being impacted by the size and amount of loan liquidations, modifications, extensions and resolutions reported on a monthly basis, leading to a potential slow-down in the reporting of new delinquency for the remainder of 2011,” the research firm stated.

Delinquency of at least 30 days worked out to 8.22 percent in June, falling from 8.35 percent a month earlier.

In June 2010, the rate of CMBS defaults was 7.70 percent.

But despite the improvement between May and June, Morningstar said that CMBS delinquency could wind up exceeding 9 percent this year.

By property type, the 12.2 percent delinquency rate on hotel loans was the highest. Hotel delinquency improved, however, from 13.2 percent in May.

Industrial loans followed, dropping to 10.9 percent from 11.1 percent, then multifamily, which was unchanged at 9.5 percent. Office defaults of 7.0 percent were also unchanged, and the retail property rate fell to 7.3 percent from 7.4 percent.

Nevada’s 23.3 percent delinquency rate was higher than any other state. After that was 17.3 percent in Arizona. Florida’s 14.4 percent followed, then 12.4 percent in both Georgia and Ohio.

By vintage, 2006’s 12.7 percent delinquency was the highest of any vintage since 2002.

The report indicated that master servicers have placed 34 percent of hotel loans on their watchlists, while a quarter of industrial loans are on watch and 21 percent of office loans made the list. The office rate is a concern because it represents the category with the highest aggregate balance: $39.9 billion.

The rate of retail properties on the watchlists was 20 percent, while the rate dropped to 14 percent for multifamily loans and 8 percent for healthcare properties.

By state, 28 percent of loans in both Florida and Georgia were on the watchlists, then 26 percent for Arizona and 25 percent in Texas. North Carolina followed at 24 percent, then California’s 23 percent. The Golden State’s $20.8 billion in outstanding CMBS loans on the watchlists was the highest of any state.

At 31 percent, San Diego stood out as the city with the highest rate of CMBS loans on the watchlist. Close behind were Atlanta and Dallas-Fort Worth, which were both at 29 percent. The fifth-worst rate was 28 percent in Phoenix.

CMBS loans in special servicing have skyrocketed from $4.5 billion in January 2008 to $86.5 billion as of last month.

Among CMBS loans liquidated in June, the biggest loss — $43.8 million — was with the Chapel Hills Mall in Colorado Springs, Colo. The balance on the loan, before the loss, was $111.3 million.

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