Post-Katrina CMBS Prospects: Still Murky

From a ratings perspective, the U.S. commercial mortgage-backed securities (CMBS) market has weathered the devastation of Hurricane Katrina reasonably well. But with cleanup efforts still underway, the question of whether or not displaced Louisiana residents and businesses will return to the affected region creates a murkier long-term picture for the CMBS sector, reports Fitch Ratings.

“Temporary assistance, such as disaster relief being provided by FEMA and other relief organizations and business interruption insurance claims, is helping property owners make debt payments, which may be keeping delinquencies artificially low,” says Patty Bach, a senior director at Fitch Ratings. “Some borrowers are paying out of pocket to keep loans current until insurance proceeds are finalized, which may lead to higher CMBS delinquencies if proceeds are not enough to repair or rebuild properties.”

Though they sustained hurricane damage, properties located in the French Quarter (which represented 45% of all New Orleans Katrina exposure) and Central Business District (12% Katrina exposure) of New Orleans stand to perform better than others in the city in the short term, though the city's recovery is a major factor in how the properties do in the long run.”

“The speed of New Orleans' recovery is also important for cities such as Baton Rouge that have benefited from the storm as it will affect how long displaced residents and businesses stay, or whether they choose to relocate permanently,” says Bach.

New Orleans office vacancy, while still high (41% as of year-end 2005) is on the decline, while operable multifamily and hotel properties have benefited from housing residents forced to relocate after the storm. However, the longer-term prognosis remains dependent on the creation of jobs and the return of convention and tourism business.

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