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Fitch: CMBS defaults should decline despite risks

The delinquency rate for loans underpinning commercial mortgage-backed securities (CMBS) should stay low to close out 2018, despite looming risks from higher interest rates and struggling retail assets, Fitch Ratings reported.

CMBS delinquencies among Fitch-rated loans will stay in the 2.25 percent to 2.75 percent range, and be kept down by the stable performance of newer vintages, a relatively low volume of maturities and special-servicing activity, the company said.

cmbsdefaultIn June, the CMBS delinquency rate stood at 2.72 percent, which was down 49 basis points year over year and down from 9 percent at the peak of delinquencies in July 2011.

More than half of the CMBS loans originated before 2010 are delinquent, however, Fitch said. Two-thirds of the delinquent legacy loans are collateralized by real-estate-owned (REO) properties. By contrast, the so-called “CMBS 2.0 loans” originated post-crisis had a delinquency rate of just 30 basis points as of June.

“We expect the decline in the delinquency rate to continue, although slowly, through the end of the year on continued stability of CMBS 2.0 loans,” Fitch reported.

“The majority of our negative rating outlooks are due to underperforming or declining regional-mall loan performance and/or specially serviced loan concentrations,” the company wrote. “We also believe new issuance volume will remain strong and continue to outpace portfolio runoff.”

After 2018, CMBS delinquencies could rise, Fitch said. Rising interest rates add to the risk of defaults as it becomes harder to refinance maturing loans. Newly rated CMBS deals typically consist of loans with rates below 5 percent. Fitch-rated maturities will total less than $9 billion by the end of 2018, including loans that are taken out of pools early through defeasance. Maturities will climb to $10 billion in 2019 and $12 billion in 2020, Fitch said.

Fitch also noted risks of default from struggling Class B mall properties. Retail assets have declined in the composition of the typical CMBS pools over the past two year, and are being replaced by volatile suburban office and hotel assets. 


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