Pedestrians go through commercial real estate in Manhattan.
Michael Nagle | Bloomberg | fake pictures
Delinquencies in commercial mortgage-backed securities last month had their biggest one-month increase since Fitch Ratings began tracking the metric nearly 16 years ago.
The delinquency rate reached 3.59% in June, an increase of 1.46% in May. New delinquencies totaled $ 10.8 billion in June, bringing the total delinquencies 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 only the beginning. Fitch analysts are projecting that the impact of 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 worrisome because they could negatively impact property valuations, which could ultimately result in losses for CMBS investors,” said Melissa Che, senior director at Fitch, CMBS.
CMBS investors tend to be large institutional investors such as pension funds, banks, insurance companies, and mutual funds.
Short-term 30-day delinquencies are becoming 60-days delinquencies at a much faster rate, and are expected to continue throughout the summer.
Some sectors are doing 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%)
- Multi-family: 0.59% (from 0.41%)
Hotel and retail loans made up 49% ($ 7.7 billion) and 34% ($ 5.4 billion), respectively, of total 30-day delinquencies. If everyone is 60 days behind, that would put them above their peaks of the Great Recession.
When business loans are in trouble, they are transferred to special services for leniency or repayment plans. In the three months from March to May, 439 commercial mortgage-backed securities loans, or $ 21 billion, entered special services, up from 674 loans, or $ 9 billion, for all of 2019, according to Fitch. For comparison, in the two months leading up to the pandemic, only 34 CMBS loans entered special services.
“The borrower can work with the administrator to modify the loan, but if the borrower is too far from the loan, he could return the keys,” Che said.
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