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CMBS Loan Delinquencies Up in Second Quarter

The balance of U.S delinquent loans jumped from $2.8 billion to almost $3.4 billion during the second quarter, reports Fitch Ratings. That brings the Fitch Loan Delinquency Index (LDI) up to 1.62%. At the close of the first quarter, it measured 1.39%.

Fitch expects the LDI to reach 2% by year-end. The firm also expects the LDI to continue to rise in 2004. Fitch consider a loan delinquent when the borrower is 60 or more days overdue on payments.

The troubled loans were found in all property types except retail. In fact, the delinquent balance on retail loans fell by 6% to $724 million. That’s a $40 million drop from their $764 million total at the end of the first quarter.

"While delinquent hotel and retail loans continue to dominate the Index, making up 60% of the total delinquent balance, there have been substantial increases in the delinquent balances of office, industrial and multifamily loans over the past three months," says Mary O’Rourke, senior director at Fitch Ratings.

She adds that loans secured by office and industrial properties will continue to see higher delinquency rates than they have in the past. She expects retail delinquencies, on the other hand, to level off over the remainder of the year unless there is, in O’Rourke’s words, "another spate of large chain-store bankruptcies."

Office LDI grew by 42% between the first and second quarters while the industrial LDI rose by 54%. Fitch blames the crippling effect of falling rents and rising occupancies for the increase, and also expects delinquency balances to increase over the remainder of the year.

The industrial sector’s LDI balance outweighed even the embattled hotel sector’s level, which posted only a 27% increase in its delinquent loan balance between the first and second quarters. Regarding those hotel loans, O’Rourke says that hotel properties typically experience their peak occupancy during the summer months, so delinquencies in loans in that property sector should hold steady through the third quarter. The wild card, says O’Rourke, is a "significant national or global event" that could change people’s willingness to travel.

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