Choppy Waters Ahead for Maturing CMBS Loans

Posted on July 28, 2016

CMBS loan delinquencies have ticked higher in recent months and experts are predicting a more volatile stretch for the second half of the year as more large loans mature.

Both Fitch and Trepp, research firms that track the market, have reported increases in CMBS loan delinquencies over the past few months. After slight increases in April and May, CMBS loan delinquencies took a step higher in June. Trepp reported a 25 basis point increase in delinquencies from 4.35 percent in May to 4.60 percent in June, while Fitch reported a 20 basis point increase from 2.98 percent in May to 3.18 percent in June.

“We have seen an uptick in loans heading to special servicing because borrowers are trying to figure out what they need to do and whether or not they need to put up extra equity in order to refi these loans,” says Melissa Che, director in the U.S. CMBS group at Fitch Ratings. Both firms agree that delinquency levels rose due to three large loan delinquencies that hit the market in June. These included the $474.6 million Skyline portfolio, the $136.3 million JQH Hotel portfolio and the $101.5 million loan for Southern Hills Mall in Sioux City, Iowa.

CMBS loan delinquencies are certainly much improved compared to the peak of the recession when delinquencies reached a high of 9.0 percent in July 2011. However, delinquencies are still elevated by historical standards. For example, during 2004 and 2005 CMBS loan delinquencies were at sub-2.0 percent, according to Fitch. However, by dollar volume, those delinquencies also are much higher today given the record issuance that occurred in 2006 and 2007 at $198.4 and $228.6 billion respectively, according toCommercial Mortgage Alert, an industry newsletter.

“I think the paltry issuance total thus far in 2016 has affected the delinquency rate, since the denominator of non-delinquent loans is not increasing via new issuance to offset new delinquencies,” says Sean Barrie, a research analyst at Trepp in New York City. The volume of U.S. issuance through mid-July was at $34.8 billion, which is well below the pace from the same period last year at $61.8 billion, according to Commercial Mortgage Alert.

As issuance dwindles and risk retention rules kick in by year’s end, many tried-and-true lenders are starting to back out of the game, adds Barrie. Many of the maturing loans will have a difficult time getting refinanced without a shot of additional equity or other capital. So a growth in the CMBS delinquency rate in the coming months is certainly possible, he notes. There are still more than $200 billion in CMBS loans set to mature between now and 2017.

The concern is with the borderline 1.0 coverage loans that were made with nearly 100 percent loan-to-value ratios and weaker underwriting. Many of the best structured and well-performing loans have already gone through the defeasance process and been refinanced.

“What we’re left with in a lot of these pools is a bit of a mixed bag. So that adds a little bit to the uncertainty of whether or not these loans will be able to refi,” says Chris Bushart, senior director in the U.S. CMBS group at Fitch Ratings. “When you look at the ratings that we have on our transactions, if we have concerns, the ratings will reflect that.”

According to Fitch, retail, office, hotel and industrial sectors are all reporting delinquencies above 4.0 percent, while the multifamily sector is at sub-1.0 percent. Retail has the highest delinquency rate of all the property types, which is likely due to concerns related to performance of class-B malls and properties in secondary and tertiary markets, notes Che. In addition, there are sub-categories within each sector and pockets of weakness that are getting more scrutiny right now. For example, multifamily has a low delinquency rate overall, but Fitch is keeping a close eye on student housing loans where there has been a surge in development activity and more competition added to the market in the past few years.

“We will see delinquencies continue to be volatile for the remainder of the year, because of all of these larger loans that are coming due this year,” says Che. The borrower’s ability to either refinance or pay off will be dependent on market liquidity. In particular, fourth quarter will be one to watch due to loans maturing during that period.