Hotel loans have surpassed multifamily loans for the dubious distinction of highest CMBS delinquency rate, according to Fitch Ratings.
The overall CMBS delinquency rate hit 3.58 percent in September, up 54 basis points (bps) since August and up 243 bps since the beginning of the year. And that grim trend doesn’t look to end anytime soon.
“We expect overall delinquencies to exceed 5 percent by the end of the year,” says Mary MacNeill, managing director for Fitch Ratings. “It will continue to steadily rise, then start to level off near the end of 2012.
The multifamily delinquency rate rose 28 bps to hit 5.72 percent in September. But a surge in hotel defaults in September, on 26 loans totaling $1.1 billion, helped to push that sector into the lead position, at 5.83 percent.
Currently, the largest delinquent multifamily loan is a $195.1 million Babcock and Brown portfolio of 14 properties spread across Nevada, Texas, Maryland, Florida, Virginia, and South Carolina. The now-defunct Column Financial originated that loan. A $225 million loan for the 12-building Harlem community called Riverton Apartments, originated by German American Capital Corp. (a subsidiary of Deutsche Bank), is currently in special servicing, though it is performing, according to Fitch.
Multifamily’s reprieve from the No. 1 spot is more reflective of the hotel industry’s current woes than any positive trends in the multifamily industry. And multifamily’s position in the No. 2 spot may not last very long. Should the $3 billion Stuyvesant Town/Peter Cooper loan default, as expected, the multifamily delinquent rate would balloon to more than 10 percent.
A separate report recently released by Moody’s Investor Service paints a different picture, pegging the multifamily delinquency rate at 6.09 percent, rising 58 bps in September to register the highest delinquency rate of any asset type in the history of CMBS.
The overall delinquency rate hit 3.64 percent, according to Moody’s, as the hotel sector saw the biggest increase last month, growing 79 bps to 4.97 percent.
The difference between the two ratings agencies’ findings are a result of the fact that their portfolios of rated loans differ—some loans rated by Moody’s may not be rated by Fitch, and vice versa.
According to Moody’s, the rise in multifamily delinquency rates last month was partly attributable to the $165 million Bethany Portfolio I becoming delinquent in September. That portfolio was located mostly in the Phoenix area.
Fitch rated the second Bethany Portfolio loan (B2), of $130.5 million, but not the first. The B2 portfolio was transferred to special servicing in February, and by early March, the borrower had abandoned the properties. Foreclosure on those 11 communities, spread across Georgia, North Carolina, and Virginia, is imminent, the agency says.
Still, any way you add it up, the rising rate of CMBS delinquencies isn’t halting anytime soon.
The IRS recently announced a new regulation allowing servicers to modify and restructure securitized loans before they slip into default, without incurring severe tax penalties. In the past, a borrower could only negotiate a modification once the loan went into default and was transferred to a special servicer. While the move helps, the lack of liquidity on the market is a bigger issue.
“Until there’s liquidity in the market, it’s very hard for the servicers to work out these loans,” MacNeill says. “The new REMIC laws might help a little bit, but unless lending returns to the market, there’s going to be an awful lot of loans in the workout phase.”
