August CMBS Special Servicing Rate Declines

Trepp, New York, reported the volume of commercial mortgage-backed securities loans and assets in special servicing declined again in August, falling three basis points to 3.22 percent.

But Trepp Research Analyst Dylan Wall said the modest drop in the CMBS special servicing rate might be misleading. “While the rate continues to decline month over month, it’s worth noting that the decrease seen in August is nowhere near as substantial as the decrease that occurred in July [when the rate declined by 11 basis points].”

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, said the “evaporation” of the final legacy CMBS and its residue means that the aggregate problem loan numbers will continue to decline. “But that’s all backwards-looking to pre-crisis conditions,” he said. “The instructive data continues to be the very smooth path of CMBS 2.0 deals indicating the durability of more conservative underwriting and favorable market trends.”

Olasov said anyone involved in real estate lending understands that the default level will never fall to zero. “That would imply that creditworthy requests are not being considered, underwritten and booked,” he said. He noted the overall U.S. CMBS 2.0+ special servicing rate grew slightly during August to 1.39 percent. “A special servicing rate below 1.5 percent that includes loans approaching their tenth anniversary is surprisingly low for any credit product,” he said.

Fitch Ratings, New York, reported CMBS property net operating income growth has slowed but remains positive. NOI within the U.S. CMBS multi-borrower universe Fitch tracks increased an average of 1.9 percent in 2018 compared to 2.1 percent in 2017 and 3.4 percent in 2016.

For properties that reported financials in both 2017 and 2018, nearly 60 percent by loan count reported an NOI increase, Fitch said. “Similar to 2017, all major property types experienced some level of NOI growth in 2018, with the exception of hotels, which had a nominal decline,” the report said. The report said industrial properties returned 2.9 percent NOI growth last year, compared to 2.5 percent for multifamily, 1.6 percent for office and 0.8 percent for retail assets. Hotels experienced a 0.2 percent decline, Fitch said.