Commercial mortgages in the securitized secondary markets face some hurdles in 2012, but also some opportunities.
One hurdle could be five-year loans from 2007, which were originated during a period of relatively loose underwriting and are maturing this year.
Successful refinancing of these loans as well as issuance will play a role in how high delinquencies will get, Huxley Somerville, head of U.S. commercial mortgage-backed securities at Fitch Ratings, said on Fitch's 2012 structured finance outlook conference call. Extensions could continue to ease the concern around maturing loans.
Somerville said delinquencies in the sector could reach 10% but it's likelier they will be 50 basis points to either side of their current level. CMBS loan delinquencies on Fitch's overall index covering the period between 2004 and the present have been at 8.41% and at the beginning of 2011 they had started at 8.23%.
In addition to issuance and maturing loans, clearly the economy will be a factor in determining CMBS delinquency rates in 2012, as evidenced by the impact on the sector of Sears' decision last week to close more stores. A Morningstar report last week said there are at least 486 CMBS loans with an unpaid principal balance of about $20 billion with exposure to Sears and Kmart as a tenant. Fitch foresees little risk of a negative rating impact but acknowledged there are about 255 Fitch-rated loans with exposures to the stores.
Still, there have been some good signs for CMBS in the past year, including some stabilization in delinquencies, Somerville said. Prospects are still good for the multifamily sector, with the exception of legacy CMBS, he said.
David Durning, senior managing director at Prudential Mortgage Capital Co., said multifamily has been "the darling of institutional investors" in the past year and he expects that to continue, although there is some concern about the sector overheating and areas suffering economic strain.
Somerville said that while Fitch is wary of budget hotels, particularly in tertiary areas, overall lack of new supply in recent years could provide a buffer against significant declines if the economy backtracks.
