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MBA report

Finance woes continue to plague commercial sector

The Mortgage Bankers Association reported the commercial mortgage-backed securities, or CMBS, delinquency rate is the highest since 1997 -- and while the rate locally wasn't immediately clear, more delinquencies are expected in San Diego County, as well.

Between the fourth quarter 2009 and first quarter 2010, the national 30-plus day delinquency rate on loans held in CMBS rose 1.54 percentage points to 7.24 percent.

The 30-plus day delinquency was still at less than 1 percent as late as mid-2008, before it rocketed upward.

No less than $1.4 trillion worth of CMBS debt will require refinancing between now and 2014.

"The CMBS maturities are just huge," said Mark Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego.

"We're expecting the CMBS defaults to peak out at 12 to 15 percent in 2011 or 2012," said Tim Wright, a Holliday Fenoglio Fowler senior managing partner.

When asked if he believes the CMBS trouble is as significant here as it is for the country as a whole, Wright said, "I think so, because lending out here was as aggressive as anywhere else."

Wright said CMBS mortgages that were interest-only and partial interest-only instruments -- where the borrowers had little or no equity before they got into trouble -- and CMBS loans made during the 2005-07 timeframe are most at risk.

Riedy said the numbers aren't a lot different here, because San Diego's unemployment figures aren't much higher (10.4 percent versus 9.7 percent) than the national average was in May.

Daniel Phelan, president and CEO of Kearny Mesa-based Pacific Southwest Realty Services, said while he doesn't know the CMBS default level locally, he has little doubt CMBS defaults numbers will continue rise here as they have in the rest of the country.

"As leases roll over, companies are going to downsize and the vacancies will rise -- so I see more defaults," Phelan said.

Riedy agreed, saying, "Even if you are able to get these buildings refinanced, if your tenant goes from 50,000 to 25,000 square feet, you're going to take a hit."

Phelan expects a fair number of CMBS defaults on office buildings here because lenders have become stingy when it comes to loaning money for new businesses that might re-fill spaces vacated during the recession.

Riedy, a former Fannie Mae (NYSE: FNM) CEO, has sympathy for the banks, noting that due to federal regulations for every dollar of capital a bank loses, the lender must come up with roughly $10.

"They have to retrench," he said.

CMBS loans on such hotels appear to be at the most risk of going into default.

With lower occupancies and RevPAR (revenue per available room) rates lower than they have been in many years, Riedy said more hotels will default on their CMBS loans for a long time to come.

Phelan said while retail properties have been hammered nearly as hard as hotels, the problems there have pretty much bottomed out.

It is a mixed bag for industrial properties depending on where they are located.

A lot of CMBS-related defaults may be expected in Otay Mesa for example where about 3 1/2 million square feet of space is vacant.

Phelan expects fewer vacancies in single-digit vacancy markets such as Kearny Mesa and Miramar, where land constraints have prevented too much space from getting built.

Apartments are by all accounts, the strongest "commercial" asset class here with vacancies that have quite consistently been at 5 percent or less in San Diego County.

While there have been some exceptions, little CMBS trouble is expected in this sector.

As for when he expects the CMBS issues to ease, Riedy said that will coincide with substantive job growth.

"We went into this (downturn) earlier so we may see the job growth really happen in early rather than late 2013," Riedy said.

If the delinquency rate on CMBS is a chasm, the issue of delinquencies on loans held in life company portfolios is a minor dip.

The MBA reported the 60-plus day delinquency rate, on loans held in life company portfolios, increased 0.12 percentage points from the fourth quarter of last year to 0.31 percent in the first quarter of 2010.

When asked why there was such a huge disparity between the life company default rates and those of CMBS, Wright had two reasons.

One is the CMBS loans are much more highly leveraged, and finding the responsible party is a much easier task when the loans haven't been packaged into a pool.

"When you have a life company to deal with, you can talk to the lender," Wright said.

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