CMBS Liquidation Volume Continues to Fall

Commercial mortgage-backed securities liquidation volume fell in February to the lowest level in nine months, reported Trepp, New York.

The average loss severity also remains low, Trepp noted. Last month, 29 loans totaling $377.3 million paid off with losses. Those 29 loans had a 32.5 percent average loss severity, down from 35 percent in January and considerably below the 47.1 percent six-month moving average.

Carlton Fields Executive Director of Financial Services Consulting Brian Olasov said both losses and the volume of resolutions are slowing down as legacy CMBS dwindle from month to month in favor of CMBS 2.0 outstandings. “That’s bound to make losses more scattered and more barbelled,” he said. “That’s exactly what we’re seeing, with overall losses dominated by a couple of big losses and several other resolutions barely registering losses at all.”

The retail sector had the largest realized loss total in February with an aggregate $66.8 million in retail loan losses–mostly from the write-down of the $59.9 million Chesapeake Square note–Trepp said. Commercial Real Estate Direct reported the Chesapeake, Va. retail center sold for $19.5 million after foreclosure, resulting in a $51.1 million loss to the $73 million original balance loan.

The office sector posted the highest average loss severity and the retail and lodging sectors accounted for more than half of February’s disposition volume, Trepp said. But the $96.8 million of hotel debt that paid off with losses was resolved with only 6.1 percent average severity, which brought the month’s overall loss percentage down significantly.

Wells Fargo Securities’ 2018 CMBS Default and Loss Study analyzed more than 102,000 loans across nearly 800 fixed-rate conduit CMBS transactions issued between 1995 and February 2018. It found the cumulative default rate stands at 18.41 percent for the 1995-2016 vintages. The cumulative loss rate equaled 4.65 percent.

Vintages that have made it through a 10-year cycle showed a 24.02 percent cumulative default rate and a 6.10 percent cumulative loss rate, Wells Fargo Securities said. Post-crisis vintages issued between 2010 and 2016 exhibit strong performance, with cumulative default and loss rates of 0.88 percent and 0.05 percent, respectively.

The retail property type had the lowest default rate among pre-crisis vintages with 21.50 percent while hotels showed the highest rate at 29.38 percent, Wells Fargo Securities said. Among post-crisis vintages, multifamily-backed loans demonstrated the weakest performance with a 1.85 percent default rate while industrial-sector loans showed the strongest performance with a 0.21 percent default rate.

“We continue to see a clear relationship between underwritten metrics loan to value, debt service coverage ratio and debt yield and collateral performance,” Wells Fargo Securities said.