CMBS Delinquencies Appear to Stabilize—For Now

The latest report from the Kroll Bond Rating Agency on the $286 billion of commercial mortgage-backed securities it tracks indicates delinquencies could be leveling off.
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The CMBS delinquency rate fell 40 basis points from June figures, at least in the $286 billion universe of loans that the Kroll Bond Rating Agency tracks.

READ ALSO: CMBS 2.0 Hotel, Retail Loans Spur Rise in Delinquencies

According to the company’s July update, that represents “a welcome reprieve from the delinquency rate’s steep (downward) trajectory since the start of the coronavirus (COVID-19) pandemic.” In May and June, the delinquency rate had jumped more than 300 basis points each month.

However, let’s take a moment to understand why delinquency rates have moderated for now.

Sacheen Shah, Director, Kroll Bond Rating Agency. Image courtesy of Kroll Bond Rating Agency

Delinquencies fell in July to 7.8 percent ($22.3 billion), from 8.2 percent ($23.5 billion) in June. One reason was that some large-balance single-asset/single-borrower and large loan transactions moved out of delinquency as a result of forbearance and modification agreements. (More on this below).

Among conduit transactions, delinquencies were almost motionless at 8.7 percent vs. 8.8 percent in June. About 14 percent of loans delinquent in June were classified as current for July, while a slightly smaller number became newly delinquent. Servicer commentary seemed to indicate “that a fair number of the loans may have entered into forbearance or modification with the servicer or special servicer that allowed the borrower to bring the loan current,” KBRA reported.

Hospitality still recorded the highest total rate of delinquency and special servicing (25.3 percent) among all property types, followed by retail and mixed-use properties, at 14.9 percent and 8.8 percent, respectively.

The report emphasizes that although these and other metrics “point to stabilization in the delinquency rate, there is still plenty of stress and uncertainty” in the commercial real estate sector. COVID-19 continues to spread across the U.S., often at record speed. Further, KBRA noted the U.S. GDP plummeted 32.9 percent in the second quarter, for “the sharpest economic contraction in the country’s history.”

Zooming in 

Among the 90 SASB and LL transactions (totaling about $53 billion) that KBRA tracks, 14 loans had been transferred to special servicing in June. In July, however, two were transferred back to the master servicer.

Of the SASB/LL transactions (mentioned above) that moved out of special servicing in July, the report highlighted four. One, collateralized by a $600 million loan secured by a portfolio of hotels, has seen the borrower enter into a standstill agreement. It provides for a moratorium of three payments of debt service, plus a waiver of deposits into the reserve funds.

The second is collateralized by two loans secured by the Destiny Mall, Syracuse, N.Y. The total outstanding balance is $430 million, and here, too, the borrower entered into a standstill agreement.

The borrower on the third transaction, with a $713 million loan secured by a portfolio of hotels, entered into a forbearance agreement, and the loan went back to the master servicer.

The fourth transaction was collateralized by three loans secured by super-regional malls in three different states; the total outstanding balance is $553 million. The transaction was scheduled to mature in June, but the parties agreed to push that back to June 2021.