Fitch Ratings: CRE Defaults Likely To Rise After Forbearance Periods
Fitch Ratings, New York, said it anticipates commercial real estate loan defaults will rise at the end of forbearance periods.
“Eventual credit losses will depend on underwriting standards and market fundamentals affecting collateral values,” Fitch’s CRE Risk Pressures Small, Concentrated Banks report said.
The report noted underlying credit issues will likely start to emerge by the third quarter, as banks are generally offering borrowers payment deferrals of at least three months. “The shortest deferral periods among these are likely to be extended to six months,” Fitch said.
The report said large banks benefit from greater diversification than small banks and lower exposure to “at-risk” commercial real estate sectors such as retail and lodging.
“Since the Great Recession of 2008, smaller banks have gained market share in the U.S. bank CRE lending market,” the report said, noting banks with less than $100 billion in assets have increased their CRE lending while large banks have pulled back. “As a result, large banks also tend to be more diversified and less exposed to CRE in general, with only around 50 percent of capital on average exposed to CRE and construction lending.”
Fitch said it expects hotel and retail assets to be hit hardest by pandemic-related fallout. It forecast the Fitch U.S. commercial mortgage-backed securities delinquency rate will continue its rising trend and peak between 8.25 percent and 8.75 percent by the third quarter’s close. The CMBS delinquency rate peaked at 9.01 percent in July 2011 during the Great Recession.
Loans secured by commercial real estate assets with tenants were generally well underwritten after the 2008 Great Recession, typically based on sustainable in-place cash flows and with at least 20 percent equity, the report noted. “That said, given the unique nature of the current economic crisis, Fitch believes the future loss experience for some non-owner-occupied commercial real estate asset types could be higher than what is implied by expected credit loss models,” it said.
