NEW YORK CITY-It appears that as goes the jobs reports, so goes CMBS delinquency. So says Standard & Poor’s, which highlighted the correlation between the gradually declining US unemployment rate and the gradually diminishing CMBS delinquency rate in a recent report.

“As we’ve observed in the past, the delinquency rate tracks job growth fairly closely,” S&P analyst Larry Kay wrote in a quarterly report issued in late February. “With the unemployment rate falling for the fifth straight month in January, the credit pendulum may reverse course if this trend continues, which could set the stage for lower delinquency rates.” Along these lines, Moody’s Investors Services noted a correlation between an uptick in hiring, improving commercial real estate fundamentals and a lessening of losses on CMBS maturity defaults, even if 2012 may bring a number of such defaults as 2007-vintage loans come due.

Although neither S&P nor Moody’s had issued their reports on CMBS late-pays for February by press time, both ratings agencies as well as Trepp have charted a downward trend in delinquencies lately. S&P’s latest figures put CMBS delinquency at 8.86% in January, down from 8.95% at the end of 2011, although it noted that the delinquency rate remained relatively flat throughout 2011 even as the actual dollar amount of loans in arrears eroded.

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Using a different yardstick, Moody’s reported a smaller decline of two basis points to 9.3% in January. The month also saw the largest inflow to date of newly delinquent loans--$6.4 billion—although the $7.2 billion of resolutions offset this. The 2002 and 2007 vintages showed the largest monthly rises in delinquency rates, increasing by 100 and 58 bps, respectively, according to Moody’s. Loans from 2006, by contrast, experienced the largest drop at 55 bps.

For its part, Trepp this past Friday reported a “sharply lower” CMBS delinquency rate in February after a fluctuation of just a few bps per month since this past fall. The 9.37% reading matched June 2011 as the lowest figure over the past 12 months. Newly delinquent loans put upward pressure of about 60 bps on February’s late-pay rate, according to Trepp.

For the year as a whole, S&P says it expects the delinquency rate to be in the 9.50%-10% range. That’s unchanged from the agency’s previous forecast.

“Although the rate stabilized near the 9% level in 2011, we believe the highly leveraged maturing loans issued in 2007 (45% of total fixed-rate 2012 maturities) may pressure the rate, especially in the midst of a slowdown in loan originations, property sales, and commercial real estate fundamentals,” Kay wrote. “We expect modifications/extensions to be high for these loans (average balance of $31 million), as we've seen larger balance loans typically get extended. Given the higher balances, however, the default of even a small percentage of these larger loans would have a noticeable effect on the overall delinquency rate.”

As the current cycle progresses, loans have been spending more time in special servicing, Fitch Ratings says. The number of months in special servicing has increased to 16.9 months on average as of year-end 2011, compared to 12.8 months a year earlier and 9.02 months as of year-end 2009. Fitch says the increase is due to several factors, among them “unprecedented transfer volume, varying available liquidity and the complexity of the larger loans that characterize the transfer volume.”

Fitch says it expects this trend of longer times in special servicing will continue, since the number of loans going into special servicing appears to be on the rise. The five-year maturities on 2007 CMBS originations are likely to add to this tally.

Even so, Fitch says, the volume of loans in special servicing has actually been declining since the peak earlier in the current recovery. That’s due to loans either returning to performing status or liquidating via payoff or selling REO.

Instant Insights /

As Unemployment Falls, Will CMBS Late-Pays Follow?

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