CMBS Delinquency Rate Resumes Decline

After a brief uptick in October the commercial mortgage-backed delinquency rate resumed its long-term downward trajectory in November, reported Trepp LLC, New York.

The delinquency rate began to fall steadily in June 2017. It has dropped in 15 of the 17 months since then, Trepp reported.

The overall delinquency rate for U.S. commercial real estate loans in CMBS now equals 3.33 percent, down nine basis points from October, Trepp said. The November rate represents a new low for the reading since the financial crisis. The delinquency rate peaked at 10.34 percent in July 2012.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, said our collective perceptions have changed when we look for signs of cracks in CMBS. He noted nearly three-quarters of all specially serviced loans are from legacy CMBS, meaning only six-tenths of one percent of CMBS 2.0 loans are in special servicing at the moment. “At the same time, almost two-thirds of CMBS delinquencies–which includes REO–are in REO form,” he said. “As these REO assets liquidate out of trusts and as legacy loans evaporate, delinquency percentages will continue to drop.”

Though credit quality on CMBS 2.0 loans shows some statistical deterioration, the number of problem loans and realized losses have been low by any historic measurement, Olasov said. “The surprise doesn’t come from the deterioration, but the fact that the deterioration this late in the cycle has been so mild,” he said.

Fitch Ratings, New York, updated its view on each of the four main CMBS property types. It said the multifamily and office sectors are “peaking” while the hotel sector has peaked and the retail sector has entered the “declining” stage of the cycle. “The multifamily market remains strong and demographics continue to favor the multifamily sector,” Fitch said. “As Fitch still considers the sector to be approaching a peak, Fitch expects to cap revenues at year-end 2017 levels.”

The office vacancy rate held steady in the third quarter at 16.6 percent, up just 20 basis points from a year ago. But this seemingly benign increase conceals vast differences between poor-performing markets such as Greensboro/Winston-Salem, N.C. with a 25.2 percent vacancy rate and Dayton, Ohio (28.8 percent vacancy) and healthier markets including New York with an 8.1 percent vacancy rate and San Francisco (9.3 percent vacancy).

“Fitch continues watching for the impact of deliveries of large amounts of new (office) supply expected through 2019,” the report said.

As the hotel sector outlook moves past “peaking” to “peaked,” Fitch said it continues to limits occupancy, average daily rate and revenue per available room metrics to 2014 levels as a starting point when studying individual hotel cash flows for sustainability. “Leisure transient demand remains strong, though it is more vulnerable to fluctuation as it is sensitive to gasoline prices, airline ticket prices and other travel-related considerations,” the report said.

“Both consumer confidence and consumer spending levels remain very strong as of September. Corporate demand may level off in the coming months as U.S. trade policies affect business spending and investment.”

Hotel supply growth is hovering around its 2 percent long-term average and will likely remain at or above demand for the balance of this upcycle, Fitch said.

Meanwhile, tenant bankruptcies and store closings continue to take a toll on the declining retail sector, Fitch said. Sears, David’s Bridal, Gap and Lowe’s Home Improvement Centers have all either filed for bankruptcy or announced more than 50 North American store closings over the past three months.

“Class B malls, particularly those with weak anchor tenants, located in markets with dominant malls or located in secondary/tertiary markets with demographics insufficient to support multiple malls, remain a concern in the retail sector,” Fitch said.