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NEW YORK CITY-CMBS loans in special servicing increased by 6% in September, Fitch Ratings said Thursday. The addition of 103 loans totaling $1.8 billion means that 14% of the CMBS loans rated by Fitch are now in the hands of special servicers.

Fifty-nine percent of those specially serviced loans are still performing, according to Fitch’s “What’s in Special Servicing?” report released Thursday. Largest of these is the Extended Stay portfolio, a $4.1-billion non-recourse loan backed by 681 hotels, an office building and a vacant parcel. According to Trepp, which ranks it as the largest delinquent CMBS loan, the outstanding balance on the loan is currently about $588 million. The loan went into special servicing in June as Extended Stay filed for Chapter 11 bankruptcy.

The trend of performing specially serviced loans outnumbering nonperforming ones is likely to persist through the remainder of the year, says Adam Fox, Fitch senior director. “More borrowers will seek loan modifications, since recent US Treasury regulations allow servicers increased flexibility to modify performing loans,” he says in a release.

Providing further evidence of declining conditions for legacy CMBS, FTN Financial said in a report this week that late-pays on CMBS have reached 4.34%. Meanwhile, Fitch, in several separate actions, has downgraded more than 150 classes of the securities since the beginning of the month. Similarly, Moody’s Investors Service has cut its ratings on dozens of CMBS classes since October began.

The likelihood of the number of performing specially serviced loans increasing through year’s end dims the prospects for the increasing bulk of loans being resolved any time soon. As the volume of distress approached $140 billion by the end of August, “resolutions continued to inch ahead, reaching 15% of sales associated with distress, but that was far below any point of equilibrium that investors may hope to see,” according to the October monthly report from Real Capital Analytics. “With occupancy and rent fundamentals continuing to weaken across the board, and with low volume continuing to cloud pricing, a reversal remains unlikely and imbalance is taking root.”

RCA says that although the volume of assets going into default, foreclosure or bankruptcy fell off “sharply” in August compared to the July tally of $15.8 billion, the $9 billion in new distress was more than twice the monthly sales volume of $4.3 billion. Additionally, new distress in August was higher than in any previous month that didn’t also include a major bankruptcy.

The monthly rate of new distress declined in only two property types: industrial and, perhaps surprisingly, hotels. New industrial property distress was down 38% from $368 million in July to $230 million in August, according to RCA. In the hospitality sector, new distress for the month declined 80% from $8.3 billion to $1.6 billion.

August’s highest-volume sector was office, up 31% over July tallies for $3.3 billion in new trouble. Office distress is now on par with apartment distress, according to RCA. That compared to $950 million in sales of office properties during August, 22% of which was for distressed assets.

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