CMBS Delinquencies Hit All-Time High; Relief on the Horizon

The CMBS delinquency rate has hit an all-time high in May 2012, surpassing the 10 percent mark. But many of those delinquencies are five-year loans that originated in 2007, meaning that the second half of the year should see a leveling off.

The time has come: The CMBS delinquency rate hit an all-time high in May 2012, surpassing the 10 percent mark as the rate saw its third consecutive month of increases. In May alone, the delinquency rate rose 24 basis points to 10.04 percent but, since March, has risen 67 basis points. Trepp pulled no punches in its report.

Back in December, we predicted that 2012 could be a rocky year for CMBS in terms of the delinquency rate, the agency wrote in its May 30, 2012 report. At the time, the delinquency rate was hovering at 9.51 percent and had stayed in a fairly tight band for a number of months. We wrote that the market could easily see a spike of 70 basis points in the short term, as five-year loans that were securitized in 2007 began to reach their maturity dates.

That prophecy now appears to be have come true. The CMBS delinquency rate set an all-time high in May. Overall, the delinquency rate for U.S. commercial real estate loans in CMBS jumped 24 basis points in May to 10.04 percent. In the process, the rate broke through the 10 percent threshold for the first time ever. Whether the rate creeping into double digits for the first time carries some psychological impact remains to be seen.

But there is good news on the horizon. According to CIT Real Estate Finance, approximately $1.4 trillion in CMBS transactions are coming due in the next three years, which is going to create an excellent climate for financing. Since many lenders are saddled with large portfolios and a number of European banks are experiencing funding issues, there is a need for financing for new construction or financing to add value to existing properties in the middle market space, according to Matt Galligan, Group Head of CIT Real Estate Finance at CIT Group Inc.

And Trepp has good news as well, noting that the CMBS market is seeing the heavily front-loaded five-year loans originated in 2007 come to maturity. By the end of June, the number maturity dates will start to dwindle — and, as a result, the upward pressure that this has put on the rate should be coming to an end.

“While cracking the 10 percent barrier might weigh on the market’s psyche for a short time, there are likely better days ahead in terms of delinquencies over the next six months, Manus Clancy, a senior managing director at Trepp, said. A big driver of the recent surge in the delinquency rate has come from loans that were originated in 2007 that are coming due now. As we get later in the year, the impact of this trend will dissipate. The next two or three months could be bumpy, but the second half of the year should bring a leveling off of the rate.”