CMBS 2.0 Special Servicing, Defaults Volume Remains Low

Special servicing volume and loan defaults remain low for commercial mortgage-backed securities loans disbursed after 2010.

Fitch Ratings, New York, reported just 0.6 percent the CMBS 2.0 universe it rates was in special servicing through November.

“Even the most stretched year, 2014, is clean in comparison to legacy vintages,” said Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York. “Overall, defaults below one-third of 1 percent outperform most investors’ original expectations.”

Fitch said nearly all of the 90 CMBS 2.0 loan defaults so far this year have been term defaults. The only maturity default, the $67 million Fashion Outlets of Las Vegas loan, transferred to special servicing in August well before its November maturity date.

Olasov noted loss of demand and occupancy decline both share market-driven excuses rather than borrower issues in CMBS 2.0 defaults. “These two reasons, loss of demand and occupancy decline, contribute to three out of five defaults,” he said. “When fracking demand declines in North Dakota or anchor tenants go dark, macroeconomic shifts can rapidly change the risk profile of a given property and are treacherous to forecast.”

Moody’s, New York, said conduit credit quality improved during the third quarter. Leverage as measured by Moody’s loan-to-value ratio declined to 115.5 percent while debt service coverage ratios increased. “Other positives included higher shares of investment-grade loans and high quality pari passu loans,” Moody’s said. “Offsetting trends were worsening interest-only loan concentrations, subordinate debt levels and single-tenant risk.”

Other positive credit trends boosted overall pool quality, Moody’s noted. The share of low-leverage loans assigned an investment-grade assessment jumped to nearly 13 percent in the third quarter–the second-highest quarterly level during the CMBS 2.0 era.

DebtX, Boston, noted prices of commercial real estate loans underlying CMBS fell slightly in October–the latest data available. The estimated price of whole loans securing the CMBS universe declined to 97.2 percent from 98.7 percent at the end of September. Prices equaled 99.1 percent a year ago.

“CRE loan prices in the CMBS universe have continued their downward trend since mid-summer,” DebtX Managing Director Will Mercer said. “Prices declined as Treasuries rose.”