U.S commercial mortgage-backed securities (CMBS) upgrades will outpace downgrades in 2003, predicts Fitch Ratings. Still, Fitch projects that the performance of the four main property classes (hotel, office, retail and multifamily) will continue to decline.

"The ratio of upgrades to downgrades will be similar to 2002 ratios and will reflect a higher number of downgrades compared to historical trends," says Karen Trebach, director at Fitch Ratings.

A projected decline in consumer spending in 2003 is putting additional stress on retail loans, so Fitch expects more bankruptcies and liquidations of national retailers. Multifamily delinquencies also are on the rise amid heightened competition and record home ownership levels in the United States. Adding uncertainty to the mix is the prospect of a new Gulf War, renewed terrorist attacks on U.S soil and the chance of a double-dip recession.

Through the 11 months that ended on Nov. 30, Fitch upgraded 352 tranches in 111 deals, downgraded 126 tranches in 51 deals, placed 115 tranches in 40 deals on Rating Watch Negative and affirmed the remaining tranches. The pace of upgrades in 2002 (21.7% of all deal reviews) fell short of 2001 levels (31.3%). The 2002 downgrades (10%) far exceeded the 2001 downgrades (2.3%).

The pace of downgrades, in fact, exceeded the pace of every other year since 1994. Clearly, a weak economy and real estate market nationwide has affected CMBS transaction, but the default level is not as high as many expected or as compared to the real estate recession of the early 1990’s. Fitch attributes this positive news to stricter underwriting guidelines though each transaction must be analyzed on its own merits.