Weak Job Market Strong Dynamic in Commercial Mortgage Performance


The nation’s poor employment picture has become one of the biggest impediments to a perceptible recovery in the mortgage markets – both for residential and commercial real estate.

Job loss is now the primary trigger of default among struggling homeowners, and two separate research reports have uncovered a clear correlation between state-specific delinquency rates for commercial mortgages and unemployment levels.

Fitch Ratings says currently, 10 states have delinquency rates in excess of 10 percent when looking at the universe of commercial mortgage-backed securities (CMBS) loans rated by the agency. All but one of those states – Hawaii – ranks among the worst with respect to unemployment levels.

States with the highest CMBS delinquency rates in Fitch’s study:

  • Nevada: 25.85%
  • Hawaii: 18.03%
  • Michigan: 15.66%
  • Arizona: 14.75%
  • Mississippi: 12.26%
  • Georgia: 12.05%
  • Indiana: 11.65%
  • South Carolina: 10.61%
  • Florida: 10.42%
  • Tennessee: 10.22%

“Though certain macroeconomic indicators have been more encouraging of late, CMBS delinquencies will not subside anytime soon,” said Mary MacNeill, Fitch Ratings managing director. “National employment underpins demand for every property type and a jobless recovery for the U.S. economy foretells continued challenges ahead for commercial real estate.”

Nevada also claims the highest delinquency rate among CMBS loans rated by Moody’s Investors Service, and by a

very large margin. Commercial mortgages in securities that are backed by properties in Nevada carry a delinquency rate of 26.22 percent, according to Moody’s study.

That’s three times the national delinquency rate, Moody’s says, and more than double the state’s 12.48 percent delinquency rate in December 2009. Nevada continues to outpace Michigan – another high-unemployment state and the second highest delinquency rate in Moody’s report (third highest in Fitch’s) – by over 11 percentage points.

Moody’s points out that Nevada loans make up less than 2 percent of loans in U.S. CMBS.

Looking at the overall delinquency rate for CMBS loans, Moody’s reports that it jumped to 8.24 percent in September – an increase of 14 basis points from the previous month. It was the smallest monthly increase in the national delinquency rate tracked by the company since October 2008, and the fourth consecutive month of only modest growth, but Moody’s warns of reading too much into the decelerating pace.

“This easing of the rate of growth in the delinquency rate does not necessarily portend a near term improvement in the market,” said Nick Levidy, Moody“s managing director. “The number and balance of loans becoming newly delinquent remain high, but in the past few months the number of loans that became current, worked out, or disposed has increased.”

In September, Moody’s tracked 311 loans totaling nearly $3.8 billion that became newly delinquent, while 238 previously delinquent loans, totaling approximately $3.3 billion, became current or were liquidated.

Fitch reports a similar rise in delinquencies. The agency says CMBS late-pays rose 18 basis points to 8.66 percent last month despite a declared end to the recession by the National Bureau of Economic Research.

Both New York-based ratings agencies pin the worst performance of CMBS loans on the hotel property sector, ranging between 16 and 21 percent.

The commercial real estate research firm Trepp LLC, however, says to expect a big drop in CMBS delinquency rates for the month of October, namely because a deal has been closed for the purchase of $3.9 billion in debt backed by Extended Stay Hotels, which had been in default.

Trepp says with the Extended Stay bond out of the past-due bucket, delinquencies for October could show a dip of about 35 basis points overall, with an even more dramatic impact in the hotel sectors numbers, which could fall by as much as 500 basis points.

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