CMBS Delinquency Rate Falls Below 3%

Michael Tucker mtucker@mba.org

March 14, 2019


The commercial mortgage-backed securities delinquency rate crossed another threshold in February, falling below 3 percent for the first time since May 2009, reported Trepp, New York.

"Delinquencies fell again last month, driven once more by the squeezing out of more remnants from the pre-crisis era," said Trepp Senior Managing Director Manus Clancy. He said February's reading fell to 2.87 percent, down 15 basis points from January and a new post-crisis low.

Clancy noted post-crisis "CMBS 2.0" issuance has generally held up well, "[but] there are some pockets of concern that merit watching," he said, citing student housing, grocery-anchored retail and certain cities such as Houston where several large assets are contending with sizable delinquencies.

"Breaking through the artificial 3 percent barrier isn't all that interesting until you pull apart the component pieces, " said Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York. "Since two-thirds of special serviced loans are from legacy, we can anticipate that as the servicers dispose of REO, the numbers will continue to decline."

Olasov said the real question surrounds the current pace of resolutions and the inflow of newly delinquent loans from CMBS 2.0 deals. "The pace of resolution slowed throughout 2018 as selection bias filtered to more problematic properties coming on the block," he said. "CMBS 2.0 continues to show only slight variations month-to-month with most loans returning to corrected status. Watchlists continue to grow, but that's a very imperfect predictor of problems down the road. "

Trepp's February Delinquency Report said the office sector saw the greatest month-over-month improvement. The office sector's delinquency reading dropped 34 basis points to 3.13 percent. Retail remained the worst performing sector, but its reading fell 15 basis points to 4.77 percent. The retail delinquency rate has improved for five consecutive months.

Moody's Corp., New York, said CMBS liquidations increased to a record high loss severity in 2018, but the annual loss amount declined. Moody's U.S. CMBS Loss Severities 2018 report said 482 loans were liquidated last year for a $4.3 billion total loss, the lowest annual loss since 2014. But the annual loss severity reached 56.2 percent last year, up significantly from the 43 percent weighted average loss severity for all loans liquidated since 2000.

"Retail was the largest loss contributor in 2018," Moody's said. Nearly 200 retail loans were liquidated during the year, leading to a $1.6 billion aggregate loss. Multifamily had the highest annual loss severity among property types at 84.8 percent, followed by retail at 64.5 percent.

The average workout time for loans liquidated in 2018 increased, Moody's said. The weighted average time to resolution for liquidated loans grew to 21 months, significantly higher than 2017's 16-month average for liquidations.

DebtX, Boston, said prices of commercial real estate loans underlying CMBS decreased in January. During the month, the estimated price of whole loans securing the CMBS universe decreased to 96.7 percent at the end of January from 97.6 percent at the end of December. Prices were 96.5 percent in January 2018.

"The decrease in loan prices in the CMBS universe in January was primarily the result of an increase in base market spreads," DebtX Managing Director Will Mercer said.

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