Commercial Servicer: Slumping Real Estate Markets Pose Challenge to Commercial Servicers.(Brief Article)

The commercial real estate sector has been hit with a slew of bad news in the second quarter. Vacancies have risen (particularly in some office markets with a high technology concentration), rents are slowing down and delinquencies are up. Even multifamily property, which is largely seen as the bulwark of the sector due to its defensive qualities, has not been immune.

Of most interest to servicers, Standard & Poor's has reported that the Real Estate Owned (REO) segment of the Commercial Mortgage-Backed Securities (CMBS) market has reached its highest level of delinquencies - both in terms of dollar amount and as a percentage of total delinquencies - since the rating agency began tracking CMBS delinquency statistics.

The rating agency defines REOs as "real estate properties that have been foreclosed upon and are currently owned by the issuing trust." By S & P's reckoning, overall CMBS delinquency rates reached 1.08% for the second quarter, an 8% increase over the first quarter, with a total amount delinquent of $1.22 billion. And REOs, at 45%, showed the most increase for the period, S & P reports. REOs totalled $292 million towards the end of July, the rating agency said, with lodging and healthcare properties accounting for 46% and 20% of total REOs, respectively. This is not surprising given that the lodging sector has been hurt by oversupply in recent years and that the recent slowdown in the economy has resulted in an all- around cut down on travel. And the woes of the healthcare sector due to the changes in the government reimbursement policy ushered in by the Balanced Budget Act have also been well publicized.

What is surprising is that the multifamily sector is also beginning to see the impact of the slowdown. A new Merrill Lynch quarterly report tracking the multifamily rental market in 31 major cities concluded that "apartment market conditions across the nation weakened appreciably during the second quarter." The firm's securities research and economics group reports that at this time Real Estate Investment Trusts (REITs) have stopped raising rents and are more concerned about "limiting downside in the operating performances of their portfolios." In a bid to boost their occupancy rates, they are even offering more concessions. For the 14 REITs tracked ...