Fitch: US CMBS Loss Severity to Rise Markedly Next Year
Fitch believes the higher volume of resolutions and high recoveries in 2008 belie the current condition of the commercial real estate market.
With US CMBS servicers needing more time to resolve delinquent loans combined with market value declines, loss severities are expected to rise markedly for US CMBS next year and well into 2010, according to Fitch Ratings.
More than three-fourths (78%) of loan resolutions resulted in no losses to the trust last year.
But with commercial real estate debt capital remaining scarce, disposition times will increase to between 24 and 36 months as special servicers are contending with a record backlog of loans (up over 300% since beginning of the year).
‘Special servicers may have to hold certain properties until liquidity returns to the market,’ said Senior Director Britt Johnson. ‘Though recent REMIC reforms may help mitigate loss severities, defaulted loans will take more time to be resolved and losses often will be deferred until maturity.’
Multifamily loans represented an average cumulative loss severity of 38.6% in 2008, with that number likely to increase as many markets have seen increasing levels of unemployment and are suffering from oversupply. Other property types that will see increased loss severities include office (33.3% cumulative average loss in 2008) and hotels (39.5% last year). It should be noted that other property types other than multifamily collectively make up a significantly smaller piece of the CMBS loan universe.
That being said, another area that Fitch is increasingly concerned with of late is hotel loans (39.5% cumulative average loss in 2008). ‘Additional hotel losses and defaults are likely as sponsors may deplete reserves or discontinue coming out of pocket to pay debt service on underperforming assets,’ said Johnson.
For details see U.S. CMBS Loss Study: 2008
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