Continuing the discourse on the plight of commercial real estate (CRE) and the high risk investors take by playing for a recovery in this sector is a report from Fitch Ratings warning that the commercial mortgage-backed securities in its ratings universe face negative rating action due to continued deteriorating conditions in CRE.
Even as a broader economic recovery gets underway, Fitch sees operating cash flows for CRE weakening for the next 18-24 months. Fitch warns that it “is conducting an ongoing portfolio review incorporating its prospective views and taking rating actions based on this anticipated declining performance.”
While approximately 4 percent of all loans issued between 2006 and 2008 were delinquent as of the end of the third quarter of 2009, resolutions have to date been negligible, with only two loans, at less than $5 million each, being resolved with losses across all three vintages. Of the 5 major property types within CRE, hotels and multi-family have performed the worst to date. This is not surprising given that high unemployment would immediately impact these two areas. Retail, office and industrial properties have delinquencies that are also trending higher, just at a slower rate. Fitch anticipates that delinquencies in CRE will reach 6 percent by first-quarter 2010 and could peak at 12 percent in 2012.
How office and retail properties go from here may be the key to how bad things get for CRE. If the delinquency rate rises for these three types to the pace of hotels and multi-family, such deterioration may bring about another banking crisis, smaller than last year’s crisis that was triggered by deteriorating residential mortgages, but painful nonetheless. The CRE crisis may not completely derail the economic recovery, but it will slow it significantly, and it would all but guarantee a slower-than-trend growth rate for several years.
Fitch’s comments on office and retail are as follows:
Office
Though delinquencies remain low, the office sector will see stress in the coming months, as unemployment climbs through the coming year and longer term leases come up for renewal. Vacancies have reached 15% nationwide and are expected to rise higher in the coming year. Though larger central business district markets continue to outperform suburban markets, landlords are facing a swift decline in base rents, significant concessions, and vacant sublet space, now that tenants have gained the upper hand.
Retail
The retail sector continues to struggle due to cautious consumer spending, increased vacancies, and limited store openings, which have pressured rents. Owners are struggling with vacant big box spaces, as retailers across the country review their lease agreements for co-tenancy clause rent reductions or rights to terminate.
Please click on the following link to view the full report at Fitch Ratings [subscription and/or registration may be required]: Structured Finance: Commercial Mortgage Special Report.
Like this:
Be the first to like this post.
Gregg D. Killoren
victoria1014
Commercial Real Estate to Continue Deteriorating: Fitch
Continuing the discourse on the plight of commercial real estate (CRE) and the high risk investors take by playing for a recovery in this sector is a report from Fitch Ratings warning that the commercial mortgage-backed securities in its ratings universe face negative rating action due to continued deteriorating conditions in CRE.
Even as a broader economic recovery gets underway, Fitch sees operating cash flows for CRE weakening for the next 18-24 months. Fitch warns that it “is conducting an ongoing portfolio review incorporating its prospective views and taking rating actions based on this anticipated declining performance.”
While approximately 4 percent of all loans issued between 2006 and 2008 were delinquent as of the end of the third quarter of 2009, resolutions have to date been negligible, with only two loans, at less than $5 million each, being resolved with losses across all three vintages. Of the 5 major property types within CRE, hotels and multi-family have performed the worst to date. This is not surprising given that high unemployment would immediately impact these two areas. Retail, office and industrial properties have delinquencies that are also trending higher, just at a slower rate. Fitch anticipates that delinquencies in CRE will reach 6 percent by first-quarter 2010 and could peak at 12 percent in 2012.
How office and retail properties go from here may be the key to how bad things get for CRE. If the delinquency rate rises for these three types to the pace of hotels and multi-family, such deterioration may bring about another banking crisis, smaller than last year’s crisis that was triggered by deteriorating residential mortgages, but painful nonetheless. The CRE crisis may not completely derail the economic recovery, but it will slow it significantly, and it would all but guarantee a slower-than-trend growth rate for several years.
Fitch’s comments on office and retail are as follows:
Office
Retail
Please click on the following link to view the full report at Fitch Ratings [subscription and/or registration may be required]: Structured Finance: Commercial Mortgage Special Report.
Share this:
Like this: