Experts Anticipate Weaker Commercial Credit.

After a few years of good performance on the commercial mortgage delinquency front, it looks as though delinquencies have hit a bottom and will start going up again in 2008. For one, it looks as though the subprime mortgage market-generated credit crisis that has taken over the news this year has started to slow down the economy as banks cut down on their lending while attending to their own books.

A slowing economy, which even has some economy watchers speculating on the possibility of a recession, will mean reduced job growth, which will cut down on the demand for all sorts of commercial space and limit possibilities for rent hikes. And people are also watching the impact of upcoming interest rate resets on adjustable-rate mortgages. The government plan to freeze resets to some extent could help with that situation. And the Federal Reserve is likely to do whatever is necessary with interest rates to smooth out any economic slowdown.

Even aside from the state of the economy, the excesses of underwriting on commercial mortgages seen in the last couple of years are likely to catch up with these loans at some point.

Fitch Ratings expects that 2008 will be an inflection point for U.S. commercial mortgage-backed securities, with loan defaults increasing over 50% even though real estate fundamentals continue strong. This could even go up more if the real estate markets start to deteriorate.

Fitch is anticipating that a decline in loan origination next year will cause CMBS default rates to increase by about 0.2% in 2008. Going by Fitchs loan delinquency index for October, performance in commercial real estate continues to be strong, with only 0.29% of delinquencies. Even if loan performance continues strong, without changes in the underlying commercial real estate performance, higher defaults are likely to occur due to the low issuance volume and the natural ...