CMBS Delinquency Rate Measures Diverge Slightly
Following a brief increase in March, the commercial mortgage-backed securities delinquency rate resumed its downward trajectory in April, reported Trepp, New York.
Trepp said the delinquency rate for U.S. commercial real estate loans in CMBS dropped 19 basis points during April to 4.36 percent last month–only 21 basis points higher than its post-financial crisis low in February 2016.
“The delinquency rate continues to fall as expected with distressed legacy loans being resolved away at a brisk pace and newly originated loans being added to the mix,” Trepp Senior Managing Director Manus Clancy said. “We wouldn’t be all that surprised if a new post-crisis low for the delinquency rate came before the end of the summer.”
Trepp noted CMBS 2.0 loans issued after the financial crisis had a 0.55 percent delinquency rate in April, unchanged from the previous month. The delinquency reading for CMBS 1.0 loans equaled 47.41 percent in April, down 43 basis points from March.
On the other hand, Fitch Ratings, New York, reported a “brief, but small” uptick in the delinquency rate of Fitch-rated transactions in April, mainly due to the $274.4 million loan against 175 West Jackson Street in Chicago becoming 60 days delinquent.
“However, the increase is expected to be short-lived as Fitch expects the loan will be removed from its delinquency index over the upcoming months,” Fitch said. JLL reported the property recently sold to a Brookfield-sponsored private real estate fund for $305 million.
Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, noted Fitch and Trepp found different delinquency ratios because they measure different universes, but said there are common themes from both ratings agencies. First, there is a “complete mismatch” between pre-crisis CMBS 1.0 delinquencies–roughly 47.5 percent of unpaid principal balance for both analyses–and CMBS 2.0 delinquencies, just 0.40 percent for Fitch and 0.55 percent for Trepp, he said.
“Second, the bulk of these defaults are in REO, which means that resolution is just a property sale away,” Olasov said. “Obviously, as these dwindling delinquencies from 1.0 get resolved, overall performance numbers will improve.”
Olasov said if net CMBS outstandings continue to grow, the downward slope on delinquencies will become even steeper. “Absent some unexpected cataclysmic event, these improving trends are mathematically ‘baked in’ over the next several months,” he said.
DebtX, Boston, reported prices of commercial real estate loans underlying CMBS posted a modest increase in March, the latest data available.
The estimated price of whole loans securing the CMBS universe increased to 96.7 percent on March 31 from 96.5 percent on February 28, DebtX said. Prices equaled 98.1 percent in March 2017.
“Loan prices in the CMBS universe have remained in a narrow range over the past year,” said DebtX Managing Director Will Mercer. “The slight increase in loan prices in the CMBS universe in March was driven primarily by a minor decrease in U.S. Treasuries and a modest flattening of the yield curve.”
