Largest Problem Loans:

The List No One Wants To Be On

Retail Properties Make Up One in Four of Largest Delinquent or Specially Serviced CMBS Loans, No Office Properties Make the List

While millions of dollars are being pumped into the global financial system to ease the credit crunch, the rescue effort is still in the early stages and it remains difficult to obtain financing for commercial real estate or even refinancing for performing loans. Because of this, there is a growing sense that the protracted credit crunch will likely continue to swell the number of loan delinquencies and defaults.

One of the best glimpses into the state of real estate defaults and delinquencies can be found in the hundreds of billions of dollars of loans backing commercial mortgage-backed securities (CMBS).

Fitch Ratings' current rated U.S. CMBS portfolio is composed of 475 transactions with a balance of $556 billion. As of Sept. 30, Fitch’s loan delinquency index was 45 basis points due to the delinquency of 488 loans representing a balance of $2.5 billion. Delinquent loans range in size from $87,740 to $112 million, with an average loan size of $5 million. Of all the loans, 17 have outstanding balances greater than $20 million.

In addition, 246 non-delinquent specially serviced loans totaling $2.5 billion have transferred due to imminent default or other nonmonetary reasons. Although not all of these loans are likely to become delinquent and are not included in the 45 bps of delinquencies, Fitch’s loan delinquency index would double to 90 basis points if they did become delinquent. Loans in special servicing range from $87,740 to $225 million, with an average loan size of $7 million.

While CMBS loan defaults remain near historical lows, economic conditions in markets such as Texas, Florida and Michigan and borrower-specific credit issues continue to slowly contribute to growing defaults, Fitch reported.

In a report released last week, Fitch examined 20 of the largest specially serviced loans by dollar volume of the loan. Characteristics of the 20 loans discussed below vary by originator, property type, and location. One notable trend is the number of loans taken out at the peak of the commercial real estate cycle in 2006 and 2007 that have transferred to the special servicer one or two years after securitization. This is much sooner than usual. Historically, CMBS default curves show defaults peaking in years three to eight.

Another notable trend is that no office properties are included in the list. Despite the economic environment for businesses, office delinquencies have remained relatively low, with only 0.27% of all office loans delinquent. Office properties typically benefit from medium- to long-term leases that provide a degree of insulation from market downturns.

Conversely, the list is dominated by retail, multifamily and hotel properties that have greater immediate exposure to economic conditions.