Weak economy weighs on U.S. commercial real estate
Thursday January 30,
By Aleksandrs Rozens
NEW YORK, Jan 30 (Reuters) - A weak U.S. economy will sap the performance of commercial real estate this year, particularly among retail properties where stores are being shuttered because of weak sales, analysts at Standard & Poor's said on Thursday.
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The New York rating agency, which monitors the performance of $200 billion in bonds backed by commercial property mortgages, said delinquent loans could rise slightly from last year.
The rating agency said in a conference call with investors and other market participants that there were a record 178 downgrades in 2002, compared with 132 upgrades last year.
Many of the downgrades were credit-tenant lease transactions in which the deal's rating hinged on the well-being of a corporation rather than the performance of the income producing property, said Roy Chun, S&P analyst. He noted that many of the credit-tenant lease deals were with Kmart Corp. (Other OTC:KMRTQ.PK - News), which filed for bankruptcy last year.
Last year, defaults of bonds backed by commercial property loans rose to record highs, and six of them were related to transactions with Kmart as a tenant.
The delinquency rate of commercial real estate loans ranged from 1.50 percent to 1.64 percent last year, the rating agency said.
For every $100 of commercial loans outstanding, there was $1.50 in late payments. But the late payment is not felt immediately or at all by bond holders because loan servicers make whole the interest and principal payments.
Investors often feel a pinch when a loan pooled in a bond is liquidated after its borrower has defaulted.
Larry Kay, an S&P analyst, said delinquencies in 2003 could rise to between 2 percent and 2.5 percent if the economy continues to perform poorly and if there is a war with Iraq.
But Chun said that absent a sharp downturn in the economy or a war, delinquencies should range between 1.5 percent and 1.7 percent.
Other properties hurt by the economic downturn included lodging and multifamily.
Lower rents eroded income from offices and apartments, according to Kay, while offices suffered the largest increase in delinquency rates of all property types.
While commercial real estate suffered from the slowing economy and the failure of big-name tenants, bonds pooling commercial property loans outperformed other types of bonds last year.
Joseph Hu, an analyst at S&P, said 10-year AAA rated commercial property bonds narrowed in spread by 40 basis points, and the same degree of narrowing was also seen in riskier BBB-rated debt.
Much of that narrowing in spreads was due to demand for relatively safe commercial mortgage bonds by investors looking for a safe haven from corporate debt. Debt issued by corporations carried wider spreads -- the premium paid over Treasury yields -- and much of it was tied to corporate accounting scandals, as well as the swooning stock market.
Looking ahead, the supply of commercial mortgage bonds in 2003 should fall to between $55 billion and $60 billion from 2002's $62 billion, S&P said. |
