CMBS Contrasts Emerge

Falling delinquencies and slowing special servicing loan transfers year-over-year contributed to improved performance metrics for commercial mortgage-backed securities, but leverage now approaches the pre-crisis peak, analysts said.

Current CMBS delinquencies fell to 4.02 percent at year-end 2015 from a 9.01 percent peak in July 2011, reported Fitch Ratings, New York. The amount of existing defaulted loans within Fitch’s delinquency index decreased to $15 billion in December from $18 billion one year before.  

Fitch continues to see a drop in the rate of new special servicing transfers in its portfolio over the past few years, said Director Melissa Che. She noted that $5 billion of loans transferred to special servicers last year compared to $7.7 billion in 2014 and $8.1 billion in 2013.  

Moody’s fourth quarter CMBS report introduced a new metric called effective interest-only term and found that the effective IO period for conduit loans now exceeds 40 months, which equates to late 2005 to early 2006 CMBS issuances. And in an even more troubling sign, the ratings firm reported that conduit loan leverage as measured by the Moody’s Loan-to-Value ratio rose to 118.9 percent in the fourth quarter, the third time it topped the pre-crisis peak level of 117.5 percent.

“A few cautions are in order before investors race for the exits,” said Brian Olasov, executive director of financial services consulting with Carlton Fields, Atlanta. He noted that on the surface, the 6.11 percent average cap rate in the fourth quarter essentially equals 2007’s average cap rate of 6.16 percent. “That’s some evidence of a return to 2007 but for the differences in secular interest rates,” he said.  

Olasov said that cap rates reflect a combination of interest rates generally along with property market supply/demand dynamics. He said the average interest rate on 10-year Treasurys–the benchmark for CRE fixed-rate debt–equaled 4.63 percent in 2007, compared to fourth quarter 2015’s 2.19 percent average rate. He noted that expressed as a spread between conduit cap rates and 10-year Treasury rates, 2007 evidenced a spread of 1.53 percent while fourth quarter 2015 showed a much more generous 3.92 percent spread.  

Olasov also noted that Fitch found the rate of special servicing transfers fell more than 80 percent from the 2010 financial crisis. “The denominator effect is certainly having an impact as CMBS 2.0 bonds with few delinquencies now outweigh remaining legacy bonds from CMBS 1.0 for the first time,” he said.