Non-investment grade securities weathered a rough second quarter as Moody’s downgraded 16 non-investment grade securities over that span, with no upgrades. However, investment-grade CMBS fared better: Moody’s upgraded 34 and downgraded only 33.

"Second-quarter rating actions were weighted toward downgrades by a ratio of 1.44 downgrades per upgrade. As the real estate markets work their way through the current downturn, Moody’s expects the downgrade to upgrade ratio will run from balanced to slightly in favor of downgrades for at least several more quarters," says Tad Phillipp, Moody’s managing director for CMBS.

Also, Moody’s identified a problem with the A-B note structure that surfaced during the second quarter. Phillipp says that investors’ credit risk is for the most part tied to the size of the A note while the default risk of then loan is tied to the B note.

An example of this problem, he says, is a Northstar loan in which the trust portion had a Moody’s LTV of 90%, but the B note/total loan had an LTV well in excess of 100%. "It was not able to refinance after exhausting all of its extension options, says Phillipp.

The underlying trend, according to Phillipp, is that growth in building expenses has exceeded rent growth, and flat rents in many markets aren’t likely to improve in the near term.