The performance of these securities, in other words, may beapproaching a tipping point. If nothing else a 1% industry defaultrate is a psychological barrier that an already battered industry doesnot want to breach. It has been several years since the industryregistered that level of defaults, Frank Innaurato, managing directorof analytical services at Realpoint Research, tells GlobeSt.com. "Thisis the last thing the markets need right now."

Realpoint is projecting delinquent unpaid balances on CMBS loans togrow to 1.25% to 1.5% through early 2009, mostly due to the lack ofnew issuance to cover loans coming due this year.

Another indicator that the rate of default is set to accelerate: special servicing exposure is also on the rise. Fitch Ratings reports there are a number of CMBS loans from the 2006 through 2008 vintages that have already been transferred to special servicing. The rating agency is projecting defaults for 2005-2007 vintage CMBS to more than double to approximately 150 basis points in 2009.

"It is only going to get rougher over the next 12 months," Innauratosays. "We are starting to get the point where the rate of increase ofdefaults is becoming a concern. Up until now defaults have stayed inhistorically low levels." Retail loans, in particular, are sure tobegin to default in growing numbers. "There were so many that werewritten on a pro forma basis," he says.

For instance, he tells of a few newer vintage transactions written onpro forma assumptions that went into default because expected retailtenants opted not to open new stores. Meanwhile, there are a number ofloans issued that are coming due this year that will need to berefinanced. Many of these will likely be forced into default eventhough they are performing. "They are going to have extreme difficultyin finding refinancing," he says. Here too, Fitch provides supportingevidence: Retail weakness contributed to a 13 basis point increase indelinquencies in November 2008.

This increase is consistent with Fitch's – indeed the industry's --expectation that delinquencies will continue to rise to breach anotherpsychological milestone, reaching approximately 2% by year-end 2009."One percent can easily turn into 2% if the market continues in thisfashion or an unknown credit event leads to additional defaults,"Innaurato says.

Still, though, a case can be made for cautious optimism, FitchRating's managing director and U.S. CMBS group head Susan Merrick,tells GlobeSt.com. "It is difficult to predict how high defaults willgo – sure there is a good potential for a 2% default rate. But it isimportant to remember that so many of the loans, even as the dip belowacceptable debt service coverage ratios are still able to coverpayments."

Even if defaults do reach a 2% mark, Merrick says that wouldn'tnecessarily mean a deathblow for the industry. In the early 1990sdefaults were far higher, she points out, and then went on to recover.