CMBS Loan Defaults to Exceed 11% by Year-End: Fitch

While some are already touting improvements in the commercial real estate sector, ""Fitch Ratings"":http://www.fitchratings.com is expecting widespread deterioration in commercial mortgage performance to rear its ugly head.

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In a special report issued Wednesday, the ratings agency warned that loan defaults will continue to escalate for U.S. commercial mortgage-backed securities (CMBS). Fitch is projecting the default rate to rise another 4.4 percent in 2010, pushing the overall rate past 11 percent by the end of the year.

In what the agency sees as a precursor, new CMBS loan defaults increased more than five-fold last year â€" 1,464 conduit loans totaling $17.75 billion. Thirty-four percent of the increase came in the fourth quarter.

""Fourth-quarter default rates reached their highest ever levels both in principal balance and number of loans with no clear signs of stabilization,"" said Mary MacNeill, a managing director at Fitch.

The number of defaults in 2009 alone surpassed the cumulative number of defaults from the inception of the CMBS market through 2008, which totaled $17.74 billion.

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One of the biggest areas of concern for Fitch is large loan defaults, which increased dramatically last year. In 2009, 56 loans over $50 million in size defaulted, compared to just five in 2008. Not surprisingly, most of the defaulted loans came from 2006-2008 vintages.

Delving deeper into specific vintages, 2007 deals led in defaults last year, accounting for 35.6 percent by principal balance. Fitch predicts 10-year cumulative default rates on 2007 Fitch-rated CMBS to reach a staggering 27 percent.

""The aggressive underwriting and higher leverage in the 2007 vintage is leading to substantially higher default rates,"" MacNeill explained.

For the first time in five years, multifamily was not the property type with the most new defaults. That distinction went to retail last year, with 32.3 percent. Following retail was multifamily (22.1 percent), office (20.2 percent) and hotel (17.8 percent). Fitch projects sizeable default increases for each property type, with rates likely to be accelerated for office and hotel loans.

""Office defaults spiked in the fourth quarter last year, with further rental and net operating income declines likely through next year before a rebound takes place,"" said Richard Carlson, a senior director at Fitch.

Carlson added, ""Larger concentrations of hotel loans in recent vintages will translate to higher defaults, particularly among luxury properties, resort destinations, and those hotels heavily reliant on group and convention business.""