CMBS Delinquency Rate Falls Again; 2018 Issuance Slips

Commercial mortgage-backed securities finished 2018 on a positive note as December’s delinquency rate dropped to another post-crisis low, but lower delinquencies could conceal a darker picture in the broader market, analysts said.

The CMBS delinquency reading fell 22 basis points in December to 3.11 percent, Trepp reported. The delinquency rate dropped in 10 months during 2018 and shed 178 basis points during the year. December’s drop represented the 16th delinquency rate improvement in the past 18 months.

“Several months ago, we posited that the delinquency rate could have cracked 3 percent by the end of the year,” said Trepp Senior Managing Director Manus Clancy. “Although it didn’t quite drop that low, it certainly came close.”

Looking ahead, Clancy said Trepp expects the delinquency rate to continue to shrink during at least the first half of the year. “By then, most of the legacy loans which are currently distressed should be resolved and removed from the calculation,” he said. “After that, additional gains may be harder to attain.”

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, noted overall delinquency rates will “inevitably” decline as pre-2009 vintage “legacy” CMBS shrink. “It’s surprising that serious delinquency is a mere 56 basis points for 2010 and later vintages nine years on from the first bonds of CMBS 2.0,” he said.

The improving delinquency trend can conceal a darker picture in the broader market, Olasov said. “CMBS volumes suffered a weak second half in 2018 resulting in $10 billion lighter annual production,” he said. “Just as importantly, spreads across all classes blew out in the final months of 2018 rendering each deal less profitable and structured product less competitive against other lending sectors.”

Wells Fargo Securities, Charlotte, N.C., called the path followed by CMBS spreads “fairly orderly” through most of 2018, helped by healthy economic and commercial real estate fundamentals and few near-term investor concerns. “Broader [stock and bond] market turmoil, however, didn’t lay dormant for long, and after a tough fourth quarter, spreads ended the year wider in non-agency and agency,” said Senior Analyst Lea Overby in the firm’s year-end review.

DebtX, Boston, said the prices of commercial real estate loans underlying CMBS posted a modest increase in November. The estimated price of whole loans securing the CMBS universe increased to 95.9 percent on November 31, from 95.8 percent in October. Prices equaled 96.9 percent in November 2017.

“The slight increase in loan prices in the CMBS universe in November was primarily the result of a flattening in the Treasury yield curve,” said DebtX Managing Director Will Mercer.