CMBS Delinquency Rate Reverses Direction

The commercial mortgage-backed securities loan delinquency rate reversed its consistent improvement in October, moving one basis point higher to 3.42 percent, reported Trepp, New York. This marks the first rate increase in six months and just the second in the past 16 months.

But despite the slight increase, the delinquency reading remained at its second-lowest point since the financial crisis, said Trepp Senior Managing Director Manus Clancy. “There was also a silver lining as rates for four of the five major property types fell last month,” he said.

October’s delinquency rate is 179 basis points lower than a year ago, Trepp reported. The reading has fallen 147 basis points during 2018. September’s delinquency reading represented a post-crisis low of 3.41 percent, down more than seven percentage points from the 10.34 percent high reading seen in July 2012.

Kroll Bond Rating Agency, New York, said key CMBS default and loss metrics have held up well. Based on performance data through first-half 2018, the cumulative default rate increased modestly, up 0.2 percent over the last two years to 15.8 percent, KBRA said. The average loss severity equaled 49.6 percent for loans resolved with greater than 2 percent losses and 30.2 percent for all resolutions.

“While we have seen some signs of stress work its way into CMBS 2.0, overall performance has been positive,” the KBRA CMBS Default and Loss Study said, noting the cumulative CMBS 2.0 default and loss rate currently stand at 1.4 percent and 0.05 percent, respectively, while the comparable figures for pre-crisis CMBS loans are 18.8 percent and 6.0 percent.

“Of course, these figures will likely change with seasoning and as more of the 2.0 loans approach maturity,” KBRA said. “Unlike the other loans in the study, the 2.0 cohort never had to perform through a recession. It has existed, in its entirety, during the second-longest expansion in U.S. history in what some have characterized as a ‘goldilocks’ economy.”

Looking ahead, KBRA said strong employment has supported positive commercial real estate demand fundamentals, but excess supply has appeared in some markets, which typically bodes ill for future performance. “That said, we expect CMBS loans to continue their good performance for the time being given current economic conditions,” the report said.

Meanwhile, the prices of commercial real estate loans underlying CMBS declined, said DebtX, Boston. The estimated price of whole loans securing the CMBS universe decreased to 95.9 percent at the end of September from 96.4 percent on August 31. Prices equaled 97.6 percent in September 2017.

“The slight decrease in loan prices in the CMBS universe in September can be primarily attributed to an increase in U.S. Treasuries,” DebtX Managing Director Will Mercer said, noting the median adjusted loan-to-value remained at 58 percent and the median debt service coverage ratio held steady at 1.52.