Fitch: U.S. CMBS Property Sector Delinquencies Vary by Vintage.

CHICAGO -- A commercial property type's delinquency contribution by vintage can be quite different than its overall share, which is best illustrated by the multifamily sector, according to July's U.S. CMBS loan delinquency index by Fitch Ratings.

Multifamily properties in the 2003 to 2005 vintages represent over 75% of delinquent loans by balance in those vintages and almost 50% of the 2002 vintage -- significantly higher than its overall delinquency share for all vintages (30%) and also its share of issuance for those vintages (17%).

"The low cost of home ownership, driven largely by low interest rates was a contributing factor to multifamily delinquencies, but with rising interest rates and deteriorating home affordability, rental demand is expected to rise," said Senior Director Patty Bach. "One concern is the slowing demand in the condo conversion market; the return of unsold condos to the rental market may push multifamily vacancies higher and rents lower."

Another contributing factor is the highly competitive originations market for multifamily loans. Many high quality loans are being financed by federally chartered agencies instead of by the CMBS market. Consequently, multifamily properties in CMBS market have not performed as well as the multifamily market as a whole.

Reflecting different property market cycles, office delinquencies in the 1999, 2001 and 2002 vintages are 40% of delinquencies versus 23% for all vintages and 29% of issuance for those three vintages. Generally, loans originated at or near market highs are hardest hit when market dynamics turn swiftly.

The office vacancy rate was below 10% from 1997 through 2000, but in late 2001 rose to approximately 14%, according to Torto Wheaton Research. With rising vacancy rates, office rents began to soften in 2001 as well. Office vacancies peaked at 17% in 2003 but did not begin to post noteworthy declines until late 2004. Although positive rent growth was recorded in late 2005 and is expected in select markets in 2006, generally rents are still below the last cycle peak resulting in property cash flow declines when leases expire and new leases are executed at today's market rents.

CMBS delinquencies dropped six basis points in July to 0.59% down from 0.65% a month earlier. Half of the six-basis-point delinquency rate decline is attributable to the addition of seven new deals totaling $15.2 billion to Fitch's deal universe. The other half of the decline is due to loans becoming less than 60-days delinquent, being paid off, defeased, or liquidated and therefore dropping out of the delinquent universe.

The seasoned delinquency index, which omits transactions with less than one year of seasoning, dropped five basis points this month to 0.77%. The seasoned index is also impacted by the addition of deals as they age; this month two newly seasoned deals accounted for 20% of the decline.

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