The effects of the COVID-19 pandemic have been widespread and the commercial real estate market has come under pressure as a result. Property owners are coping with increases in vacancies and declines in rental incomes. Stress remains concentrated within the hotel and retail sectors, which have been most disrupted by the virus. Additionally, some landlords have struggled with rent collections, while others are looking to repurpose or find creative alternatives for space in malls and hotels that may experience prolonged vacancy declines.
This week’s chart highlights the monthly changes in delinquency, watchlist and special servicing rates in the non-agency commercial mortgage-backed securities (CMBS) universe. The spike in delinquencies in the immediate months following the pandemic’s onset was led by retail and hotel properties that bore the brunt of the lockdown. The distress for other property types such as multifamily, industrial and office remained more manageable as tenants were locked into long-term leases.
The delinquency rate peaked in June and has steadily declined in recent months. Per Trepp, the peak delinquency rate following the Great Financial Crisis (GFC) of 2007-09 was 10.34% and the COVID-19 market crisis delinquency rate peaked at 10.32%. Meanwhile, the peak special servicing rate post-GFC was 13.36% and the current rate is 10.48%. While the pace of the initial acceleration caused by the pandemic was faster than the pace resulting from the GFC, special servicing increases are slowing as resolutions are actively occurring.
Many CMBS borrowers have requested and been granted forbearance relief in the form of payment deferrals and loan modifications. Some borrowers have been allowed to use reserves to cover debt service payments to assist in temporary cash flow issues. Trepp estimates that forbearance has been granted to date for more than $30 billion across 800 loans, with hotel and retail properties having the highest number of requests.
Unlike the previous recession following the Great Financial Crisis, the commercial real estate market was on solid footing heading into 2020. Strong underwriting practices and price appreciation of the past several years may benefit conduit CMBS performance. The swift government response has also helped stabilize parts of the CMBS markets. While the CMBS industry is better positioned today to withstand financial stress, the road to recovery may be long as unemployment remains high and the timing and size of future government stimulus is unclear.
With quite a bit of uncertainty in the market, I am biased to stay defensive in higher-rated securities. The timing of a commercial real estate recovery could take years in some segments, as the impact of cash flow disruption will be difficult to predict. While delinquency rates have stabilized, special servicing loans remain elevated. Servicer advances and forbearance relief will both play key roles in mitigating losses.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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