Strengthening Economy Bodes Well for Real Estate.

With the latest indications showing that the economy has clearly recovered from the mild recession that began back in 2001 - although there is the possibility, however slight, that the momentum could be delayed if there is any other shock to the system, considering that the U.S. is engaged in an ongoing war against terrorism - commercial properties are likely to perform better going forward. This means that mortgage delinquencies are likely to go down, too. Among the positive indications, the economy posted a whooping 7.2% growth in annualized gross domestic product for the third quarter. And employment levels, which had remained low well after the recovery began, prompting market watchers to dub this a "jobless recovery," are finally on the rise.

Delinquencies are lagging indicators though, and it is likely that it's going to get worse before it gets better. A downturn in delinquencies is likely to come about after they have hit their peak sometime next year. Standard & Poor's, for one, is expecting that commercial mortgage delinquencies will trend up to 2% next year, from 1.79% for the third quarter (on a $200 billion CMBS base). And Fitch Ratings is seeing property sectors in various geographic areas being impacted by operating income declines and expects that "the softer markets will continue to see upticks in delinquent loans."

At the end of the second quarter, the delinquency rate on S&P-rated CMBS was 1.69%. In dollar terms, the rating agency reports that CMBS delinquencies totaled $3.59 billion at the end of the third quarter, a 45% rise from the end of 2002 (in 2002, delinquencies increased 15% from 2001 levels). While all the major property types have contributed to the rise, office and multifamily properties have been at the forefront. In terms of amounts delinquent through the end of September 2003, the office sector saw a 178% rise, the multifamily sector a 70% rise, retail properties 30%, lodging properties 22% and health care properties 11%. While office loans had the greatest "net delinquency amount increase in the third quarter," the sector trailed retail loans that "became delinquent," according to Roy Chun, a managing director in ...