CMBS Loan Deterioration

Via Zero Hedge, Deal Junkie, and Calculated Risk, Moody’s is in the process of reviewing more than $300B in outstanding CMBS debt (more than half of all outstanding CMBS) with downgrades inevitable.

Separately, the MBA’s Commercial/Multifamily Newslink summarizes a REIS forecast that CMBS defaults for loans made in 2006-07 will in excess of 12%. Some markets will be hit particularly hard:

Reis expects this year's default rates to reach 20.8 percent in Sacramento, 18.4 percent in San Bernardino, Calif., 16.6 percent in Phoenix, 15.8 percent in Oakland, Calif. and 14.5 percent in Detroit.

It pays to be somewhat skeptical of forecasts, but the increase in loans now on servicer watch lists is alarming:

CMBS loans on servicer watch lists increased from 0.72 percent of total balance in January 2008 to 15.6 percent last month, and Reis said more than 20 percent of CMBS loans secured by office properties are on the watch list compared to 15.2 percent of all retail loans and 15 percent of all apartment loans.

I’ve previously posted on why income property loan performance tends to deteriorate rapidly, and why some vintage years are hit especially hard.

Which Markets Have Lost the Most Jobs?

Employment has suffered the most in Detroit (no big surprise there). However, there are some surprises in the other rankings, including which markets have held up the best.

A word on methodology. I looked at the highest employment level in each market since January, 2000, and compared it to the latest level. All data is from BLS Local Area Unemployment Statistics.

Here are the results:

Employment as of November, 2008	Peak Since 1/2000	Current	Change from Peak	% Change from Peak
Detroit	2,217,186	1,899,782	(317,404)	-14.32%
San Jose	962,408	845,417	(116,991)	-12.16%
San Francisco-Oakland	2,250,832	2,138,050	(112,782)	-5.01%
Chicago	4,721,131	4,542,407	(178,724)	-3.79%
Los Angeles	6,307,149	6,098,378	(208,771)	-3.31%
Riverside-San Bernadino	1,711,443	1,658,533	(52,910)	-3.09%
Atlanta	2,650,838	2,569,010	(81,828)	-3.09%
Washington DC	2,967,601	2,882,203	(85,398)	-2.88%
Miami	2,739,126	2,668,358	(70,768)	-2.58%
Orlando	1,070,271	1,048,644	(21,627)	-2.02%
Denver	1,346,897	1,323,378	(23,519)	-1.75%
San Diego	1,485,911	1,468,666	(17,245)	-1.16%
Sacramento	1,003,441	994,697	(8,744)	-0.87%
Dallas	3,023,034	3,005,173	(17,861)	-0.59%
San Antonio	906,335	902,089	(4,246)	-0.47%
Austin	831,555	829,083	(2,472)	-0.30%
Houston	2,680,121	2,675,806	(4,315)	-0.16%
Las Vegas	936,369	934,956	(1,413)	-0.15%
Phoenix	2,022,781	2,022,725	(56)	0.00%

Detroit employment peaked in June, 2000, and has lost jobs ever since. Here is a chart showing year over year job loss for this market:

(Click on charts to open larger versions in new windows)

The market with the second worse performance is San Jose. It, along with San Francisco (to a much lesser extent), has never fully recovered job losses sustained in the dotcom bust. Here is the year over year chart for San Jose:

The best performing markets are also something of a surprise: Las Vegas and Phoenix. Both of these markets have severely distressed housing markets, and the conventional wisdom is housing difficulties drag down employment. Here are the charts for these two markets:

Finally, let’s discuss Riverside-San Bernardino for a minute. There is no question this market is hurting – I’ve discussed it previously here and here. But, a Bloomberg story with Calculated Risk commentary suggests a parallel between Detroit and this market because both have the same high (9.5%) unemployment rate. I think it’s wrong to suggest Detroit’s situation, which has had sustained job losses for eight years totaling 14.3% of it’s peak employment base, is similar to Riverside-San Bernardino, which has only lost jobs for a little more than a year and is down a little more than 3% from it’s peak. I’ve previously argued unemployment is not a good measure of market distress, because it’s possible to have very high unemployment rates and still have positive employment growth.

You can download a free report which provides similar employment charts on many other markets here.