CMBS Delinquency Rate Drops Again; More than $10B in Retail Debt Affected By Sears Bankruptcy

The commercial mortgage-backed securities delinquency rate fell 23 basis points in September to 3.41 percent, reported Trepp LLC, New York.

The drop marked the 14th time in the past 15 months the reading has improved. September’s rate drop marked the third-largest decrease seen in 2018, breaking the previous post-crisis low set in August.

Trepp Senior Managing Director Manus Clancy said the main factors contributing to the continued rate improvement included lively new issuance and resolution of distressed legacy loans. “The wind continues to remain at the back of the CMBS market,” he said. “For the last nine months, the volume of new issuance has exceeded expectations while remnants of distressed legacy debt have been closed out. That combination has helped drag the delinquency rate lower throughout 2018 and should continue for the rest of the year.”

Clancy also noted some “impressive” spread tightening. “It all adds up to a great September for the CMBS market,” he said.

September’s largest month-over-month improvement by sector was the industrial delinquency rate, which fell 108 basis points to 2.98 percent, Trepp said. The only major property type to finish the month with a higher rate was the lodging sector, which increased five basis points to 2.27 percent.

Trepp said the retail delinquency reading dropped 46 basis points to 5.01 percent last month, though it remains the worst performing property type. The research firm reported more than $10.6 billion in retail debt that features a Sears department store as a top-five tenant at the underlying property. Sears, Roebuck & Co. filed for Chapter 11 bankruptcy on Monday.

“To be sure, a liquidation would not be the death knell for all malls that feature Sears as a tenant,” the Trepp special report said. “For one, many of the poorest-performing Sears stores have already been shuttered. High-end, class A malls with a Sears location will probably welcome the chance to ‘trade up’ and replace Sears with a new big-name tenant. The largest risk will be posed to Class B and Class C malls which still house Sears.”

But Wells Fargo Securities, Charlotte, N.C., said the Sears announcement could lead to a “subdued” reaction. Sears operated 866 full-line and specialty stores under the Kmart and Sears banners as of early August and has announced plans to close 46 unprofitable stores in November, dropping the number of stores to 820. “Many of these locations are in malls that are collateral for CMBS loans,” Wells Fargo Securities said. “While the closure of an anchor tenant can be detrimental for a mall property, we believe the impact of Sears’ announcement may be more muted.”