CMBS Delinquencies Could Decline Further
The commercial mortgage-backed securities delinquency rate is likely to fall further to finish 2018 between 2.25 percent and 2.75 percent, said Fitch Ratings, New York.
“Strong new issuance activity, performance stability of CMBS 2.0 loans, the small volume of maturities for the remainder of 2018 and continued resolution activity by special servicers will all contribute to keeping delinquencies in this low range,” Fitch said, noting rising interest rates and the secular change in the retail sector will be the main risks to moving CMBS delinquencies higher after 2018.
The CMBS delinquency rate peaked at 9.01 percent in July 2011. At the end of June the overall CMBS delinquency rate equaled 2.72 percent, down 49 basis points from year-end 2017. Many current outstanding delinquencies are due to pre-2010 vintages–more than half of the CMBS 1.0 universe is currently delinquent and 60 percent of the outstanding 1.0 delinquency is comprised of REO assets, Fitch said. Post crisis “CMBS 2.0” vintage delinquencies were much lower at 0.30 percent in June.
“We expect the decline in the delinquency rate to continue, although slowly, through the end of the year on continued stability of CMBS 2.0 loans,” Fitch’s special report said. “We also believe new issuance volume will remain strong and continue to outpace portfolio runoff as much of the new issuance volume this year was from single asset/single borrower transactions.”
But starting next year, several risks could become more prominent and raise delinquencies, the report said. Future CMBS refinancing could be pressured if interest rates rise quickly. And several CMBS subsectors could also provide risk, especially retail. “The secular change in retail, which we previously identified in 2014, is likely to continue to pressure malls, particularly those Class B malls located in markets with dominant malls or in markets with demographics insufficient to support multiple malls. Continued store closures, particularly at malls with weak anchor tenancy, may increase the risk of these CMBS loans defaulting.”
Retail pressure could also have “unintended consequences” on the composition of pools, Fitch said. As retail exposure has declined in recent years, it was often replaced by hotels and suburban office properties. “In our view, hotel revenues are volatile due to their operating business nature,” the report said. “We have also seen an increase in single-tenant suburban office as a replacement, where loan performance is more binary. The property is either fully leased or vacant, with the single tenant’s business plan and financial status substantially affecting performance.”
In a separate report, Fitch said it expects CMBS defeasance activity to continue to slow. Defeasance occurs when the borrower substitutes government-backed securities such as Treasury notes for a loan’s real estate collateral to pay the loan off early.
“Defeasance activity within the Fitch-rated U.S. CMBS portfolio has slowed considerably over the last three years,” the report said. “Fitch expects borrowers will still continue to take advantage of low interest rates; however, overall defeasance volume is expected to further decline from prior years due to future anticipated interest rate hikes and lower maturing loan volume as the wall of peak vintage maturities has passed.”
DebtX, Boston, said the prices of commercial real estate loans underlying CMBS remained constant in June. The estimated price of whole loans securing the CMBS universe stood at 96.5 percent during the month, unchanged from May. Prices equaled 98.1 percent in June 2017.
“Loan prices in the CMBS universe remained flat in June as U.S. Treasuries remained relatively unchanged,” DebtX Managing Director Will Mercer said.
