Commercial Servicer: Has the Real Estate Downturn Bottomed Out? Prudential Thinks So.(Prudential Real Estate Investors)(Brief Article)(Statistical Data Included)

Commercial mortgage delinquencies are down, as per indications at the end of the second quarter. And at least one real estate market observer, Prudential Real Estate Investors, believes that the real estate downturn is bottoming out. According to PREI's midyear outlook, "The current cycle is nearing the bottom and market conditions should begin to stabilize by late 2002 or early 2003."

This would mean that the worst of the economic recession is past - since real estate is a lagging indicator - and that the economic cycle is turning positive, boding well for mortgage servicers. On the other hand, the sluggish recovery and very low growth in gross domestic product for the second quarter have given greater credence to forecasts for a "double dip" recession. If the latter scenario plays out, delinquencies could go up again.

Both Standard & Poor's and Fitch Ratings have reported a decline in CMBS delinquencies for the second quarter. Delinquency rates on domestic commercial mortgage-backed securities did not increase on a quarter-to-quarter basis in the second quarter, for the first time since Standard & Poor's began tracking them, according to the rating agency. For the period, the delinquency rate on the securities remained flat at the first quarter level of 2.05% - based on an S&P- rated universe of $114.3 billion in CMBS conduit transactions - in contrast to the previous two quarters when delinquencies increased 20% and 35%, respectively (historically, the average quarterly growth rates have been 10%). However, Roy Chun, Larry Kay and Pramit Sheth, analysts in S&P's structured finance real estate group, do not expect the delinquency rate to stabilize at these levels. They say, "This slowdown is more likely part of the digestive phase that is occurring, after the significant run-up in delinquencies, post-Sept 11."