Moody’s: CMBS Loss Severities Increase Slightly

Just m1ore than 150 commercial mortgage-backed securities loans liquidated with a 42.8 percent weighted-average loss severity during the third quarter–up slightly from 42.5 percent in the quarter before–reported Moody’s, New York.

Loans backed by retail properties saw the highest cumulative loss severity at 49.2 percent, Moody’s CMBS Loss Severity report said. Loans backed by multifamily properties had the lowest cumulative severity at 33.7 percent.

Moody’s said loans liquidated in major metropolitan areas had lower loss severities on average than those in secondary and tertiary markets. Metros with the largest populations had a cumulative loss severity of 35.8 percent compared with 46.5 percent from the non-top 25 metros. Among the top 25 largest markets, St. Louis saw the highest cumulative loss severity at 58.1 percent while Portland, Ore. had the lowest at 26 percent.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, cautioned against over-generalizing the results. “The St. Louis MSA is slightly larger than that of Portland, Ore., but roughly in the same population category,” he said. “However, among the top 25 metros, St. Louis suffered the highest loss severity while Portland experienced the lowest. Broad strokes and conclusions on commercial real estate underwriting are useful as a starting point, but can never replace property and submarket-level due diligence.”

Olasov said the Moody’s research makes clear that risk profiles and loss expectations differ “materially” between legacy CMBS and 2.0 deals. “For people who caution that we’re reverting to lower quality underwriting, the data doesn’t support that,” he said.

Morningstar, New York, reported the payoff rate for maturing loans in commercial mortgage-backed securities rose above 80 percent in October for the second time in three months. The payoff rate climbed from 75.3 percent in September to 81.2 percent in October.

The Morningstar October Maturity Report said the payoff rate for maturing CMBS loans has remained at or above 70 percent for 13 of the past 15 months. “What has been most surprising is that borrowers with highly leveraged loans have successfully repaid them at their maturity dates, which indicates that there is liquidity in the commercial real estate market and that lenders and investors don’t see property values declining significantly anytime soon,” the report said. “Low interest rates and the availability of additional subordinate debt also have contributed to the higher-than-expected payoff rate.”

Morningstar predicted the CMBS maturity payoff rate will remain above 70 percent for the remainder of 2017. “There are fewer CMBS loans left to pay off and we expect continued non-CMBS financing for loans with weaker metrics,” the report said.