CMBS Rates Up, But Show Signs of Peaking

Commercial mortgage-backed securities delinquency rates edged up to their highest levels since 2015, although analysts cautioned that those rates could be nearing their peaks.

Morningstar Credit Ratings LLC, New York, said its CMBS delinquency measure edged up to 3.19 percent in June, the highest rate since December 2015. Delinquent unpaid balances rose by 3.1 percent from May, while the balance of the universe of securitized commercial mortgages declined.

Morningstar said the delinquency rate is up by 33 basis points from a year ago and 19 basis points higher year-to-date, as many loans from 2006-07, the peak of issuance for CMBS, reached their maturity dates and failed to pay off. The postcrisis delinquency rate low was 2.76% in February 2016.

“While the delinquency rate could inch higher, Morningstar believes it is near its peak, as there are fewer CMBS loans left that we expect to default at maturity, resolutions remain high, and issuance has picked up, which would increase the denominator for calculating the delinquency rate,” the report said.

Morningstar said the CMBS delinquent UPB amounted to $24.57 billion, up $735.3 million from the prior month and up $1.75 billion, or 7.6%, from the year-earlier period. Volume of newly delinquent loans remained above $2 billion for the sixth consecutive month, hitting $2.87 billion, up from $2.10 billion the prior month.

More than 82.2% of the newly delinquent loans were from the 2007-08 vintages, indicating that the leading cause was the loans’ inability to refinance at maturity, Morningstar said. Office and retail, with a combined 67.7% of the delinquent UPB, remain the weakest sectors by property type. Over the past 12 months, the office delinquency rate jumped 131 basis points, while the retail rate climbed 121 basis points.

Morningstar said for the remainder of this year, some $17.04 billion of CMBS loans will mature. “While this year’s maturity payoff rate remains fairly low at an average of 70.3%, it has so far exceeded our expectations of around 65%,” the report said.

The report noted among metropolitan areas, Morningstar expected Washington, D.C. and Chicago to remain among the weakest, as their suburban office markets underperform.

In a separate report, Trepp, New York also sounded an optimistic tone, noting solid multifamily loan performance has resulted in a dearth of new issuance.

“The U.S. multifamily market has experienced tepid issuance and transaction volume in 2017 year-to-date, as peak levels of new supply slated for this year continue to be a concern,” Trepp said in its monthly analysis. “The markets with the highest number of units in the pipeline include top-tier and major markets such as New York, Dallas, Houston, Atlanta, Washington D.C., Seattle, Los Angeles, Denver and Austin.”

Marcus & Millichap estimate developers are expected to bring 371,000 new units to market in 2017, which would be the highest number of completions posted in 30 years. Trepp noted although the numbers indicate a glut of new supply, some experts assert that occupancy levels will be able to keep pace and remain at healthy levels as unemployment is expected to remain low, and millennials continue to drive high apartment demand.

On the other hand, Trepp Research Associate Joe McBride noted cap rates appear to be trending lower and have dampened deal volume, which indicate rising prices and investor uncertainty.

“The multifamily sector has been relatively insulated from broader market downswings due to GSE involvement and a drop in homeownership rates over the past several years,” McBride said. “Although legislative and interest rate uncertainty kept a lid on private-label issuance early in the year, activity has picked up nicely as it appears that legislation and rate hikes will happen slowly.”

Trepp said private-label issuance for multifamily CMBS loans in Q2 came in at $888.4 million, compared to $500.9 million for the first quarter. Despite the increase, the issuance level for the first half of 2017 is still down 42.5% compared to the first half of 2016. Multifamily issuance has been dwindling since the start of last year, and hasn’t reached the $2 billion mark in a quarter since 2015. Conduit loans comprised 82% of last quarter’s volume, while the large loan category represented 18%.

The report said $12.7 million in multifamily loans paid off with a loss. Multifamily loans with losses represented a low 1.7% of the month’s total disposition volume, which is below the 12-month average of 3.0%. The six-period moving average loss severity inched up to 33.0% last month (compared to 31.4% and 22.9% in the two months prior). However, the average loss severity for multifamily loans disposed in June shrank down to 15.0%.

Trepp said the multifamily delinquency rate jumped 110 basis points to 3.92% in June, while the overall delinquency rate rose to 5.75%. “The multifamily delinquency rate had not experienced a monthly uptick that steep in 18 months,” the report said. “The upturn is mainly due to two large portfolio loans totaling $318.6 million that defaulted at their June maturity dates. The overall CMBS delinquency rate has been on an upward trend over the last 17 months, as a large volume of 2006 and 2007 loans continue to come due.”

Trepp said the “last chunk” of multifamily maturities needs resolution, noting over the next six months, $2.25 billion worth of multifamily loans will come due, which represents 5.85% of the total maturing balance from now through the end of the year. Nearly 7 percent of those loans are currently delinquent, and 7.72% are currently in special servicing.

“The multifamily sector may begin to regain momentum during the second half of the year, as demand levels are high and national CMBS occupancy is just under 94%,” Trepp said. “Apartment market fundamentals have been historically strong for nearly a decade, which is resultant of the low supply levels following the financial crisis and weakness of the single-family market. Fundamentals are now slowing as new supply continues to catch up with demand.”