CMBS Servicers Working through Surge in Requests

S&P Global Ratings, New York, said commercial mortgage-backed securities special servicers are working through a “surge” in borrower requests for relief, primarily on lodging and retail properties.

“While initial forbearance agreements have generally been confined to three months and involved accessing reserve funds to meet debt service obligations, we are noticing an uptick in longer duration forbearance agreements, including one as long as 12 months,” S&P said in its U.S. CMBS Conduit Update. “We believe it is reasonable to assume that this trend will continue until a [COVID-19] vaccine or effective treatment becomes widely available.”

The overall delinquency rate for CMBS transactions fell 16 basis points between August and September to 8.1 percent, the report said. But the share of seriously (60-plus day) delinquent loans remains elevated at 84 percent.

Loan metrics for CMBS conduit new issuance transactions were generally weaker, S&P said. Leverage rose by nearly two percentage points between the second quarter and the third and debt-service coverage ratios remain high. “We note that historically low rates and high interest-only loan percentages are clearly contributing to elevated debt-service coverage ratios,” the report said.

Interest-only percentages rose somewhat quarter-over-quarter for both full-term and partial-term components, S&P said.

“The office sector is in the midst of an uncertain period regarding the future space needs of tenants, i.e., the demand side of the equation,” S&P said. “It is also important to note that office leases are typically for longer terms, on the order of 10 years or more, so any potential distress would likely take place gradually over an extended period of time.”

Just as in offices, there is some risk of deterioration in multifamily sector property fundamentals and values due to a potential population shift away from denser city centers, which could increase vacancies and drive down rents, the report noted.

“Our analysis found that retail malls have been facing significant challenges and deteriorating revenues for the past several years due to factors including the proliferation of retailer bankruptcies and store closures as consumer shopping preferences shifted to e-commerce from brick-and-mortar stores,” S&P said. “We expect retail mall performance deterioration to continue and/or accelerate in the U.S. over the next year.”

The lodging sector has seen significant pandemic-related declines in corporate, leisure and group lodging demand. “It is perhaps unsurprising that many U.S. lodging properties had minimal or negative net cash flow during this period,” S&P said. “We expect a choppy recovery in the U.S. lodging sector, depending on both hotel type and location. Luxury and upper upscale hotels in dense urban/infill locations and those dependent on corporate, group and international demand are the most negatively affected.”

Industrial real estate remains the best-performing CMBS collateral, S&P reported. “There appears little reason to believe that this property type will stumble in the near term, especially in so-called ‘last-mile’ locations,” the report said. “Not surprisingly, CMBS conduits have experienced a considerable increase in exposure to industrial properties.”