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NEW YORK CITY-Standard & Poors Rating Services has recorded its lowest quarterly level of downgrades since the fourth quarter of 2001. A company report says investors and lenders alike are flooding the CMBS marketplace with cash earmarked for real estate investments. The firm also expects US CMBS issuance volume to reach a new record in 2005, due to low interest rates, high liquidity and strong underlying real estate fundamentals.
"To achieve real estate portfolio allocation targets and desired returns, investors are funneling capital into performing as well as underperforming and speculative properties," explains S&P credit analyst Roy Chun "As a result, loans collateralized by less than stellar properties are being aggressively refinanced, mitigating negative rating actions.
"We see it happening in strong stable markets like New York and Southern California where investors feel comfortable purchasing at low cap rates," Chun continues. "Or in places like New York where investors see potential value in converting office into condos."
Chun notes that in some more depressed markets like San Francisco and Boston, there is the long-term investor who may see these markets as opportunities. "They see these as generally strong fundamental markets that are at depressed prices that will eventually turnaround. As a result we are seeing many non-performing loans that are being refinanced thus mitigating downgrades."
Standard & Poor's US CMBS delinquency rate at the end of the second quarter dropped below 1% to 0.93%, a level not experienced since 2000. There were 22 downgrades in the second quarter, down from 43 in the first quarter. Also loan paydowns and a large defeasance provided over 50% more upgrades than in the first quarter. Upgrades are expected to continue on a positive track as more loans come out of their prepayment lockout periods, defeasances continue at high levels, and loans come due for refinancing, especially in the floating-rate arena.
Kim Diamond, a managing director in S&P's Structured Finance Ratings group notes that noting that CMBS issuance in 2005 may exceed $100 billion, which would be a record level of volume Last year, CMBS issuance exceeded $90 billion.
"The underlying credit fundamentals of the US CMBS market are strong," says Diamond, "Borrowers are wielding the most power these days."
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