The number of CMBS loans of $20 million or more going into special servicing climbed sharply in the fourth quarter of 2011 to 340 from 299 the previous quarter, and all signs point to this escalation continuing as we move through 2012, Fitch Ratings said Friday. Office and retail remain the sectors most at risk of having to transfer to special servicing, says Mary MacNeill, managing director at New York City-based Fitch.

MacNeill tells Distressed Asset Investments the drop-off prior to Q4 of last year was most likely due to additional liquidity and optimism. "The fourth-quarter spike may be due to five-year loans inching closer to their '12 maturity dates, a trend which we do expect to continue, although lending has picked up as well," she says.

Fitch says approximately 16%, or 199, of the Fitch-rated loans that transferred in ‘11 are now classified as past maturity. This rate is expected to rise this year as five-year 2007 vintage loans reach their maturity date without a refinancing commitment.

As a case in point, Trepp reported last week that only 27% of the ’07-vintage CMBS loans that were due to mature this month managed to pay off as they reached their balloon dates. According to the New York Times, Trepp data indicate that nearly $70 billion of CMBS backed by New York City properties alone will mature this year, including $26 billion of loans that were originated at the market’s peak five years ago.  

“These loans are going to have the hardest time being refinanced since they were underwritten when property values and revenues were far higher,” Trepp managing director Thomas Fink told the Times earlier this month. The wave of five-year maturities this year will be followed by waves in 2014 and 2017 as seven- and 10-year CMBS loans come due, he added.

This past year, slightly more than 1,250 loans with an unpaid balance of approximately $20 billion transferred into special servicing, according to Fitch. This represented a slight drop compared to the year prior, when approximately 1,350 loans transferred totaling $26 billion. The average loan size also declined to $16 million in ’11 from $19 million in 2010.

Fitch says that office and retail loans led the new transfers in ’11, with 349 and 379 loans, respectively, moving into special serving. As office leases roll and as additional retailers consolidate space, office and retail are expected to make up a larger percentage of newer transfers, Fitch says.

On the other hand, hotel loans had the smallest number of new transfers at 104 loans. The improvements in hospitality performance will carry forward even with anomalies such as the $2.5-billion Kerzner International Portfolio, which Fitch says was transferred into special servicing earlier this month on an impending maturity default. ‘The recent transfer of the Kerzner portfolio into special servicing will result in a near-term spike for hotel loans, though the sector by and large will continue to perform much better than the last two years,” MacNeill says in a release.

The improving performance of the lodging sector is also reflected in Fitch’s assessment of CMBS delinquencies at year’s end. Earlier this month, the ratings agency noted that hotel loan delinquencies, which peaked at 21.31% in September 2010, ended ’11 at 12.02%.

Multifamily delinquencies, which peaked at 17.58% last February, finished the year at 14.42%—the highest rate among the five major sectors, but also the steepest 12-month decline. Although the office sector still enjoys the lowest CMBS delinquency rate at 6.84%, it’s also the only property type to see a year-over-year increase in late-pays.