CMBS Delinquencies Continue to Decline

Strong new issuance volume and continued resolution activity contributed to the second consecutive month of decline in the commercial mortgage-backed securities delinquency rate last month, reported Fitch Ratings, New York.

Loan delinquencies fell nine basis points in June to 2.72 percent. Resolutions equaled $630 million, far exceeding $365 million in new delinquencies.

At this pace, the CMBS delinquency rate could end the year between 2.25 percent and 2.75 percent, Fitch said. “[We] expect delinquencies will continue to decline due to relatively stable performance of CMBS 2.0 loans, similar new issuance volume from the prior year, negligible maturing loan volume in 2018 and continued resolution activity, including REO liquidations by special servicers,” it said.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, noted the delinquency data display continuing trends including winding down CMBS 1.0, aged defaults in REO status awaiting liquidation and a slowly growing CMBS universe as paydowns and resolutions are outpaced by new issuance. “A new, emerging trend is that the much cleaner loans of CMBS 2.0 are beginning to show cracks as a small chunk of newer production hits inevitable difficulties,” he said. “Maintaining less than one-third of one percentage point in delinquent loans is unnatural through the credit cycle.”

But so far, the combination of low interest rates, years of strong job creation and limited new supply has kept conditions favorable, Olasov said.

Fitch said it expects new issuance volume will continue to outpace portfolio runoff as nearly $5 billion of new issuance will be added to July’s figures and there are less than $9 billion of loan maturities including defeased loans rated by Fitch outstanding for the second half of 2018.

Most property types posted lower delinquency rates in June; only the retail and multifamily sectors saw increases. “Although the overall multifamily delinquency rate still remains the lowest of all of the property types [0.46 percent], student housing delinquencies have continued to increase,” Fitch said.

The hotel sector reported the second-lowest delinquency rate, 2.44 percent, followed by mixed-use assets at 2.46 percent and industrial properties at 2.48 percent, Fitch reported. The retail sector remained the major property type with the highest delinquency rate at 5.64 percent.

By transaction type, conduit loans had a 3.95 percent delinquency rate, large loan floaters had a 4.00 percent rate, small-balance loans reported a 0.92 percent delinquency rate, single-family rental loans had a 1.46 percent delinquency rates and Freddie Mac loans saw a very low 0.03 percent rate. Single asset/borrower transactions had no delinquencies in June, Fitch reported.

Fitch Ratings said it maintains a stable outlook on nearly 96 percent of its U.S. CMBS portfolio by balance. Most of the remaining bonds are either considered distressed (3 percent), have a negative outlook (1 percent) or have a positive outlook (0.2 percent).