Some CBMS Sectors are in Trouble


According to a report to be issued early this week from Standard & Poor's Ratings Group, there may be some signs that the commercial mortgage-backed securities market has reached a peak in certain property markets, despite the fact that issuance remains strong and real estate fundamentals remain sound.

"In some markets and property segments, we may have already tipped over the edge," says Larry Kay, an S&P analyst. "We are perched upon a very delicate equilibrium between supply and demand."

Still, the report points out that CMBS delinquencies remain at historically low levels. According to S&P data, conduit CMBS had very low delinquencies through the first eight months of 1999.

As of August 1999, the total amount delinquent was $512.5 million, a 0.61% delinquency rate based on $84 billion of rated conduit CMBS transactions. This is up slightly from the previous quarter's 0.47%.

Much of the increase is due to transactions that were issued in 1997, which increased to 0.86% from 0.51% and 1998, which increased to 0.41% from 0.26%.

According to a chart depicting aggregate delinquency statistics for rated conduit transactions, the three property types that had a higher percentage of delinquencies than the percentage they represented based on total outstanding principal balance were health care, retail and lodging.

"These three sectors are often depicted as being of the most concern to investors," said Kay. "The properties showing the lowest absolute and relative delinquencies were the office and industrial properties." Both of these sectors, Kay said, are generally considered as being well-balanced in most markets.

While the retail sector had the highest percentage of S&P-rated deals for the period 1995 to 1998, it also had the highest percentage of delinquencies - close to 40%. However, as of June 30, there were only 98 loans with an aggregate balance of $336 million that were classified as more than 60 days delinquent.

The report goes on to say that some markets and property sectors are beginning to show signs of stress.

"The current defaults and fundamentals of the three sectors - retail, lodging and nursing homes - are a cause for concern, especially given the good overall economic environment," said Andrea Bryan, another S&P analyst. "As new transactions are rated, we are cognizant of the need to weigh these observations against our existing analytical assumptions. While the event-specific defaults may be aberrations, any overarching factors that are contributing to a default trend should be incorporated into all new issue analysis."

New CMBS issuing activity in the third quarter was quite strong. Standard & Poor's rated 16 public issues totaling $7.9 billion, consisting of 10 pool transactions totaling $4.9 billion and six single-borrower transactions totaling $3 billion.