U.S. CMBS Market Poised for Fewer Delinquencies in 2014
There is more good news on the horizon for borrowers, lenders and investors in the securitized debt market.
The U.S. CMBS delinquency rate is poised to drop below 4 percent by the end of 2014, assuming the current pace of resolutions continues and new issuances remain strong, recent data from Fitch Ratings show.
CMBS delinquencies fell by just over 2 percentage points in 2013, starting the year at 8 percent and closing out at 5.98 percent, following nine straight months of declines, according to the global rating agency. Multifamily CMBS showed the best performance in 2013, with delinquencies falling by 3.6 percentage points on the year, Fitch Director Scott Pritchard noted in a mid-January newsletter.
In December 2013, “resolutions of $1.1 billion outpaced additions to the index of $717 million,” according to that weekly report. Last year’s decline in the CMBS delinquency rate was fueled in part by an active December for new CMBS issuance, “with a post-recession high of 11 Fitch-rated deals totaling $9.3 billion coming to market.”
As Mortgage Observer reported last month, U.S. CMBS origination is believed to have increased 89 percent to around $84 billion in 2013, and forecasters are anticipating another bump to about $100 billion this year.
If those positive trends continue in 2014, a year-end delinquency rate under 4 percent would mark the lowest level for the CMBS market since October 2009. Some of the factors likely to contribute to a further drop in delinquencies could include bulk asset sales by CWCapital, sales of real estate owned inventory and a relatively small pipeline of Fitch-rated loans under $20 billion coming due this year, according to Fitch.
Among all asset classes, hotel CMBS could potentially see the largest drop in delinquencies in 2014 by as much as 4 percentage points, while delinquency rates for the other asset classes are expected to fall by around 2 percentage points each. Hotel properties also saw significant gains in 2013 with delinquencies falling 2.4 percentage points from 8.87 percent to 6.96 percent. Industrial CMBS saw the least improvement last year compared to 2012, with delinquencies falling just slightly from 8.61 percent to 8.5 percent.
One potential risk to the U.S. CMBS market going forward is the decline in underwriting standards. In the December report, Fitch Ratings noted a tendency for “poorer-quality properties and loan structures” to find their way into preliminary pools. “Often, they do not make the final pool cut, but the trend is another example of declining underwriting standards,” the credit firm wrote. Fitch also highlighted a concern that pools are being filled with small-balance, low-quality properties that “improve diversification but reduce property quality.”