Trepp: CMBS Delinquency Rate Up Again

Commercial mortgage-backed securities delinquency rates increased again in March as another wave of loans turned newly delinquent, reported Trepp, New York.

Trepp said the delinquency rate for commercial real estate loans in CMBS reached 5.37 percent, up six basis points from February. “The reading has consistently climbed over the past year as loans from 2006 and 2007 have reached their maturity dates and have not been paid off via refinancing,” Trepp noted.

The CMBS delinquency rate has now increased in 11 of the past 13 months, Trepp said.

“We’re into the fat part of the maturity curve now on 2007-vintage transactions,” said Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York. “That, along with the ‘shrinking ice cube’ effect–fewer outstanding loans in the calculation–on CMBS outstanding and flatlining values in many markets are all affecting delinquency ratios.”

The CMBS delinquency rate has increased by 14 basis points year-to-date and stands 115 basis points higher than one year ago, Trepp said. The reading hit a multi-year low–4.15 percent–in February 2016 and peaked at 10.34 percent in July 2012.

“Late last year, we noted that it is hard to see the rate going down anytime in the near future,” the Trepp March Delinquency Report said. “We still believe that trend will continue until the summer as the ‘wall of maturities’ plays out. The rate should begin to level off or retreat later in 2017.”

Industrial, retail and lodging delinquencies pushed the rate higher in March, Trepp reported. Office and multifamily delinquency readings fell month-over-month.

Nearly $2 billion in loans became newly delinquent in March, which put 46 basis points of upward pressure on the delinquency rate, Trepp said. But more than $500 million in loans were cured last month, which pushed delinquencies down by 12 basis points.

Olasov said he remains hopeful that CMBS issuance will pick up as loan pipelines refill and at least slow down the rate of industry shrinkage. “In particular, 2007-vintage delinquencies are starting to spike,” he said. “Happily, CMBS 2.0 deals are still performing well with little increase in default and loss rates.”

One factor that could increase CMBS issuance going forward: Fitch Ratings, New York, reported that it has now rated CMBS transactions that incorporate the three main risk-retention structures–vertical, horizontal and ‘L’-shaped. Since December, CMBS issuers have had to retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk. “Early indicators show improvement in certain credit metrics in risk-retention transactions, although it is too early to discern whether the different structures will have a long-term impact on collateral quality or transaction performance,” Fitch said.

Fitch noted that it generally does not consider a deal’s risk-retention structure as a credit factor. “Ratings are based on the credit characteristics of the loans within the transaction, the portfolio effects of such a grouping of loans and the transaction structure [rather than on risk-retention],” Fitch said. But it noted that any effort to further align issuer interests with investor interests should limit uncertainty and improve confidence, which Fitch views positively.