Fundmantals, 'Technicals' Catching Up in Commercial Real Estate

MBA (6/20/2008 ) Murray, Michael
Rosemarie Mirabella, manager of research and emerging issues for the U.S. life industry at A.M. Best, Oldwick, N.J., said fundamentals appear to be catching up with the “technicals” in commercial real estate—with the exception of the multifamily industry.

For example, A.M. Best this week gave ING USA, Atlanta, a superior financial strength rating and issuer credit ratings of “aa-” despite its “moderate exposure” to commercial mortgage-backed securities and significant exposure to residential mortgage-backed securities.

Mirabella said she expects a “waterfall effect” in this financial cycle to fall onto other asset-backed securities—credit card receivables and “potentially higher defaults within CMBS, particularly in those markets where residential values have declined significantly such as California, Nevada, Michigan and Florida.”

“My opinion is pretty negative on the economy, in general,” Mirabella said. “I believe that although the housing market has certainly been a big part of the story, we haven’t seen how the impact of gas prices plays out on the economy, and I’m very negative about that.”

A.M. Best said the general account portfolios of ING USA’s major life subsidiaries hold high concentrations of structured securities, including significant exposure to subprime and Alt-A residential mortgages—nearly $9 billion—or over 100 percent of consolidated statutory capital.

“The CMBS market is much better protected for a lot of different reasons than the RMBS market, particularly if compared to the Alt-A and subprime space,” Mirabella said. “There is much better protection, in general, from a credit perspective.”

However, Mirabella said ING USA’s European parent, ING Groep N.V. in the Netherlands and its insurance operations provide the firm with credit flexibility, and that the ING firm is more advanced in risk management practices than other U.S. companies.

“When we go back to rising interest rates, which is inevitable at some point, it is going to be more expensive,” Mirabella said. “[ING] has tremendous access to global capital markets and a typical stand alone U.S.-based company is not going to have that.”

She noted credit card receivables would experience higher levels of default in the future and that the equity markets are “telling us that we’re not through this by any stretch of the imagination.”

“You’ve got high inflation, you’ve got more credit write-offs to come—it’s just a question of time—there’s more bad sentiment,” Mirabella said. “You’ve got rising oil and food prices and you’ve got the ongoing residential housing saga, which isn’t really showing any signs of stabilization of any significance. All those things are major, major negatives