CMBS Performance Continues to Strengthen.(Mortgage backed securities)

As the economy continues to grow and expand, delinquencies on commercial mortgage-backed securities are also touching new lows. This follows as a strong economy creates increasing demand for all sorts of commercial space, bringing vacancies down and also leading to the possibility of higher rents. And the higher levels of job creation and higher interest rates that a strengthening economy engenders also bode well for multifamily properties by encouraging household formation and rendering homeownership more expensive.

Delinquency rates on a base of Standard & Poor's-rated U.S. commercial mortgage-backed securities fell to a seven-year low of 0.58% in the first quarter, the lowest level since 1999, Standard & Poor's reports. The delinquency rate also dropped from 0.84% at the end of 2005, according to the rating agency. "Since its peak of 1.96% in December 2003, the delinquency rate has declined 70%, partly due to record volume issuance," noted Eric Thompson, a credit analyst/director in Standard & Poor's CMBS surveillance group. What he sees as "more telling" is that the actual amount delinquent fell by a substantial 38%. At the end of the first quarter, delinquencies totaled $2.48 billion on a base of $445.7 billion of CMBS, the rating agency reports.

Larry Kay, a credit analyst/director in Standard & Poor's Structured Finance Ratings group believes that "although it may be too early to call this reversal the start of a longer term trend, current economic conditions may be starting to shape individual property segment performance."

Overall, S&P has seen multifamily delinquencies fall 17%, since peaking last September. And over the same period, the rating agency has seen retail delinquencies grow 22%. Going forward, it is likely that as a slowing housing market, and rising interest rates, impact the ability of consumers to dip into their home equity, and slow down consumer spending, the performance of retail property could be further negatively impacted.

As for the impact of last year's hurricanes - Katrina, Wilma and Rita - S&P reports that they were responsible for only about 7% of the delinquencies in S&P's CMBS universe in the first quarter. At the end of the first quarter, $4.02 billion of S&P-rated CMBS was identified to be in the hurricane-impacted zone. Only about 4% of this collateral is delinquent, down from a peak of 11% last November.

Multifamily properties were the ones that accounted for the majority of the hurricane-related delinquent amount.

S&P believes this is because multifamily borrowers "which tend to be smaller and less ...