For real estate, Philly's 'Goldilocks' economy is small protection

Philadelphia's slow-growth economy, based disproportionately on health and education businesses, didn't suffer the real estate price inflation of the 1980s-90s-2000s, but it hasn't crashed like the go-go-markets, either -- we like to tell ourselves.

But that's not what the numbers say. More than 1 in 8 Philadelphia-area investment-grade real estate loans used to back commercial mortgage-backed securities has gone delinquent, according to the Horsham-based Morningstar Credit Ratings LLC agency. That's not so bad as in the Sunbelt disaster areas of Atlanta, Phoenix, Las Vegas, and Riverside, Calif., where roughly 1 in 5 CMBS loans aren't getting paid. But it's a lot more, proportionately, than have gone bad in Chicago, Los Angeles, or New York, according to Morningstar.

"Defaults always are driven by the performance of the underlying collateral (property) and the credit strength of the borrower," and the borrower's willingness/ability to put up more cash, Morningstar CMBS Analytical Servcies managing director Frank A. Innaurato told me. Those factors "are most definitely affected by the relative health" of "specific property types in given markets" -- local economic conditions.

Among the commercial properties (all of which back investment bonds issued by major banks) that are listed by Morningstar as in "liquidation" after investors fell behind on payments last month:

- Abbott Square, in Society Hill, which faces "foreclosure," with a projected loss of $11 milion on $25 million in loans; 
- Citizens Bank Center, Wilmington, which has been transfered to receiver Berkadia Commerical Mortgage, and where lenders faces losses of $18 million or more on $38 million in loans;
- Grant Plaza, in Northeast Philadelphia, where the loss of an Eckerd Drug Store and its replacement by a Dollar Tree "at a significantly reduced rate" has forced the owners to turn control to "special servicer" J.E. Robert Co., which has so far been unable to sell or refinance the center.