CMBS Delinquency Rate Falls to Post-Crisis Low

Michael Tucker,

February 08, 2019

The commercial mortgage-backed securities delinquency rate began the year the way it concluded 2018: by dropping again, reported Trepp, New York.

Trepp Senior Managing Director Manus Clancy said the delinquency reading slid nine basis points in January to a new post-crisis low 3.02 percent. He said the CMBS delinquency rate could dip below 3 percent this month. 

"After spread volatility made for a very choppy December, the CMBS market settled down considerably in January," Clancy said. "The first conduit deal of the year recently priced at impressive levels and there has been some solid spread tightening over the last month."

Fitch, New York, reported the volume of loans and assets in special servicing declined to $11.1 billion in January from $12 billion at the beginning of the fourth quarter.

More than two-thirds of special servicing volume still comes from legacy CMBS 1.0 loans and assets, Fitch said. Nearly $7.6 billion or 52 percent of the outstanding Fitch-rated CMBS 1.0 universe is in special servicing. "Special servicers continue to work out legacy 1.0 loans and dispose of the remaining real-estate owned assets," the Fitch Special Servicing Update said. "Over half of the performing 1.0 loans/assets with near-term maturities have previously been in special servicing and have had their terms extended. Fitch expects to see many of these modified loans transfer back to the special servicer as they remain overleveraged."

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, said all CMBS research tells a similar story on legacy run-off, ample capital available to refinance maturing loans and an expectation about defaults to come. "So far, the dates on those impending defaults have rolled from year to year with little deterioration visible," he said. "While watchlists have risen and fallen, default ratios continue to drop."

Olasov noted the level of loans in special servicing has "plummeted" from $90 billion in 2010 to $23.5 billion in 2017 to just $17.9 billion currently. This means special servicers earn less than they used to. Assuming a 25 basis point average servicing fee, that equals just $45 million in gross income spread across all rated special servicers. "More ominously, more than two-thirds of these balances comprise of legacy loans, which are evaporating," he said. "It would be unfortunate to lose experienced asset management talent when the inevitable downturn hits."

DebtX, Boston, said prices of commercial real estate loans underlying CMBS increased in December but remained unchanged for 2018.

"The story of CMBS prices in 2018 is that they ended exactly where they started," said DebtX Managing Director Will Mercer. "It was a remarkably flat year for CMBS prices overall."

Mercer said the estimated price of whole loans securing the CMBS universe increased to 97.6 percent at year-end from 95.9 percent on November 31. Prices equaled 97.6 percent in December 2017.

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