Learning from CMBS Losses

One of the few positive implications of incurring losses on 12,000-plus loans is that one can extract some lessons about commercial real estate lending from the experience, said Brian Olasov, Executive Director with Carlton Fields, New York.

Olasov studied recent data from Moody’s Investors Service, New York, which tracked $54 billion in cumulative losses for its quarterly loss severities report. He noted primary markets are primary for good reason. “Studies continue to show that top metros incur lower loss rates after default,” he said.

Moody’s reported the five largest metros had a 37.2 percent cumulative loss severity compared to 47.2 percent for the non-top 25 metros.

“Vintage also matters, and issuance years reflect competitive lending pressures,” Olasov said, noting the 2007 vintage alone accounted for 63.2 percent of total quarterly losses per Moody’s. “When markets were at their frothiest leading up to the Great Recession, default rates and losses given default inevitably spiked.”

It appears CMBS issuers learned their lesson, because post-crisis losses remain significantly lower than pre-2008 deals, Olasov said. “CMBS 2.0 deals continue to experience lower loss rates relative to other vintages at similar points of seasoning.”

Olasov also noted that recognizing big demographic shifts can help minimize mistakes. “For example, the movement away from homeownership and in favor of renting set a cap on multifamily losses,” he said. “To a lesser extent, as retail sales continue to migrate online, fulfillment centers strengthen at the expense of regional malls with weak anchors. Overall, the Moody’s data contributes to smarter lending and investment decisions.”

Trepp LLC, New York, reported the CMBS delinquency rate reached a new post-financial crisis low in May, falling 16 basis points to 2.66 percent. The delinquency rate has fallen in 20 of the past 23 months since June 2017.

“The CMBS market has remained remarkably resilient in the face of recent volatility,” said Trepp Senior Managing Director Manus Clancy. “Spreads have widened, but only minimally even though tariffs and trade rhetoric have taken their toll on other markets. CMBS issuance continues to march on, and as we’ve seen for the last two years, CMBS delinquencies continued to drop in May.”

Trepp said May’s largest delinquency rate drop among major property sectors was in the retail space, where the delinquency reading dropping 33 basis points to 4.29 percent. The lodging sector remained the best-performing property type with a 1.42 percent delinquency rate. The office delinquency rate fell 13 basis points to 2.98 percent.

The multifamily delinquency rate climbed 17 basis points in May to 2.16 percent, Trepp reported.