Pedestrians walk past commercial real estate in Manhattan.
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Delinquencies in commercial mortgage-backed securities last month had their largest one-month surge since Fitch Ratings began tracking the metric nearly 16 years ago.
The delinquency rate hit 3.59% in June, an increase from 1.46% in May. New delinquencies totaled $10.8 billion in June, raising the total delinquent pool to $17.2 billion.
It may not be surprising, given the massive economic impact of the coronavirus pandemic, but the numbers are still remarkable. And this is just the beginning. Fitch analysts are projecting that the impact from the coronavirus pandemic will drive the delinquency rate to between 8.25% and 8.75% by the end of the third quarter of this year.
“Delinquencies are concerning because they could have a negative impact to property valuations which could ultimately result in losses to the CMBS investors,” said Melissa Che, Fitch’s senior director, CMBS.
CMBS investors tend to be large, institutional investors, like pension funds, banks, insurance companies and mutual funds.
Shorter-term, 30-day delinquencies are now becoming 60-day delinquencies at a much faster rate, and that is expected to continue throughout the summer.
Some sectors are faring worse than others. Fitch breaks down the following CMBS delinquency rates:
- Hotel: 11.49% (from 2% in May)
- Retail: 7.86% (from 3.82%)
- Mixed use: 4.17% (from 0.95%)
- Office: 1.92% (from 1.39%)
- Industrial: 0.67% (from 0.28%)
- Multifamily: 0.59% (from 0.41%)
Hotel and retail loans made up 49% ($7.7 billion) and 34% ($5.4 billion), respectively, of the total 30-day delinquencies. If they all roll to 60 days delinquent, that would put them above their Great Recession peaks.
When commercial loans are in trouble, they are transferred to special servicing for forbearance or repayment plans. In the three months from March through May, 439 commercial mortgage-backed securities loans, or $21 billion, went into special servicing, versus 674 loans, or $9 billion, for all of 2019, according to Fitch. As a comparison, in the two months before the pandemic hit, just 34 CMBS loans went into special servicing.
“The borrower can work with the servicer to modify the loan, but if the borrower is too far underwater on the loan, they could hand the keys back,” Che said.