Sule Aygoren Carranza is managing editor of Real Estate Forum and editor of Multi Housing forum, from which this article is excerpted.

New York City—Though CMBS delinquencies declined for the sixth quarter in a row in Q2, multifamily loans are exhibiting some weakness. According to Standard & Poor's structured finance division, in the second quarter, delinquent CMBS in terms of loan amount fell 5% over the first quarter to $2.35 billion. The Q2 figure is also 40% off its peak of nearly $4 billion, achieved in December 2003. When measuring the rate of delinquencies, that figure fell three basis points from Q1 to .55%, or 71% of its peak of nearly 2% at year-end 2003. The larger rate drop, says the locally based firm, reflects the significant growth of the CMBS market.

Specifically, multifamily CMBS delinquency rates declined by six basis points to 1.05%. Still, S&P notes that apartments account for the bulk of the delinquencies, mainly attributable to the decline of the condominium sector. "With excessive condo supply and speculative buyers exiting certain markets, developers are realizing that condo conversions may not currently be the best execution," S&P analysts say. "They are reevaluating their business strategies to determine if it is more feasible to abandon a conversion plan and return units to rental status."

This move, the firm warns, could lead to additional refinance risk for the impacted loans.S&P indicates that it is closely monitoring several condo conversion deals with heightened stress levels—Credit Suisse First Boston Mortgage Securities series 2005-CND1 and CND2, and Lehman Brothers Floating Rate Commercial Mortgage Trust 2006-CCL2. The firm has expressed concern that in some markets, most notably Florida, scheduled conversion plans may not take place or may be delayed due to market conditions. In some cases, particularly areas with rising apartment rents, developers are opting to convert back to rentals, or not convert at all.

Citing the CSFB 2005-CND1 deal, S&P analysts relate that one of the three remaining loans in that pool is secured by Royal Palms, a Miami Beach hotel that was to be converted to condos. That process is now significantly behind schedule. The servicer, Wachovia Securities, put the paper into non-monetary default in April because it did not receive certain property information required in the loan documents. Additionally, the borrower failed to make its July 2006 first mortgage and mezzanine payments. While the mezz lender has stepped in to reconcile the late payments, S&P is "closely monitoring" the situation for any rating implications.

For the assets that are behind schedule on conversions, or that might end up not being converted, the firm's analysts say, "The question remains as to whether the total outstanding rated debt on these complexes could be extinguished as an operating rental facility. Several borrowers have indicated to the servicer that as a rental property, their outstanding debt could be paid off. As the amount of leverage on a conversion loan was predicated on principal reductions from condo sales, successful refinancings may be at risk."

Texas as usual accounted for most of the delinquencies, at 38%, due to the low cost of for-sale housing. Tennessee is also seeing some trouble. The main area of weakness there is Nashville, which is where four of the properties in the GMAC Commercial Mortgage Securities Inc. 2004-C3 deal are located. These assets, says S&P, have been suffering from borrower neglect, deferred maintenance and local market conditions. While the city's affordable for-sale housing attracts employers, it also attracts potential renters, hurting apartments. The city's absorption rate fell 60 basis points in Q2 and the vacancy rate rose to 6.8%, according to REIS Inc. Nashville's CMBS multifamily delinquency rate was 31.1% in the second quarter.

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Multifamily Leads CMBS Delinquencies

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