CMBS defaults hit six-year low

US CMBS defaults fell to their lowest level since 2008 last year, marking a six-year low

Driven by the recovering US commercial real estate markets, US CMBS defaults fell to their lowest level since 2008 last year, according to Fitch Ratings.

As a percentage of total outstanding CMBS loans, the default rate fell from 0.9% in 2013 to 0.6% in 2014, marking a six-year low.

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Brook Sutherland

In terms of volume, that means $3.89bn of loan defaults occurred out of the $660.5bn total balance of conduit and fusion CMBS transactions Fitch has rated since January 1993 (excluding deals issued by Freddie Mac).

Loans from 2005 through 2007 deals dominated new defaults in 2014, making up almost 90% of the total: 39.3% of the total was from 2007 loans, 29.5% from 2006 and 20.9% from 2005.

Retail defaults also emerged as the largest contributor, making up 44.5% of the total and surpassing the office sector, which had led defaults for the past three years.

Despite the continued improvement, potential interest rate hikes coupled with a “wall” of additional maturities from the market peak present looming challenges.

“Most peak vintage CMBS loans are still performing and have coupons that are, on average, higher than current mortgage rates… in most cases this should allow most CMBS loans to refinance at maturity” said senior director Brook Sutherland.

But, he added: “A more rapid increase in interest rates than expected could prove problematic.”

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