CMBS Delinquencies Fall to 3 Percent in August


Granted, a slew of bad vintage loans continues to dog the performance of pre-crisis CMBS transactions.

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But in a sign of robust industry health, the overall delinquency rate for securitized commercial mortgages fell in August to 3.02 percent, its lowest level since January, according to a report by Morningstar Credit Ratings.

Headlining the improvements were industrial loans, whose delinquencies dropped over 10 percent from the August, 2016 level. The lapsed payment rates for residential, lodging, and retail properties progressed as well, with office space the only sector that showed slight deterioration.

Underscoring the strength of the broader market, a sizable chunk of delinquencies were concentrated in just a few regions. With more than $2 billion overdue, the Washington, D.C. metro area alone accounted for nearly 10 percent of the industry’s delinquent mortgages in August, despite making up only a fraction of a percent of outstanding CMBS as a whole.

Chicago borrowers have struggled as well, holding 57 delinquent loans totaling nearly $800 million in late payments.

“Downtown Chicago has seen increasing occupancies, while the suburbs have felt the pain,” Steve Jellinek, the author of the Morningstar report, told CO. He described turbulence in the D.C. and Chicago markets as the result of simple cyclical churn. “As companies change their demands and their business plans, they’re going to pull up stakes and move to new locations,” he said.

Indeed, a bird’s-eye view of the industry yielded a rosy view at summer’s end.

Only 3.4 percent of outstanding CMBS had been sent for special servicing in August—a rate which has steadily declined from its high of 12 percent in January, 2011. The volume of newly delinquent mortgages dropped for the second straight month to $1.42 billion. And in perhaps the best omen for CMBS investors’ bottom lines, the volume of liquidated loans fell by 60 percent from the July level—marking the first time this year it sank below the billion-dollar mark.

screen shot 2017 10 04 at 17 04 30 CMBS Delinquencies Fall to 3 Percent in August
Chart: Morningstar Credit Ratings

Despite that welcome news, the sector remains haunted by the specter of failing loans that date to the freewheeling epoch before the financial crisis. In August, more than three dozen active loans that were originated in 2007 were transferred to special servicing—more than the number sent to special servicing from all years since then combined.

Even so, Jellinek believes that investors have already priced in any losses still to come from vintage loans, and that the August delinquency data is a positive indicator for CMBS nationwide.

“Interest rates are low, and underwriting is a lot more conservative,” the Morningstar analyst said, noting that any lingering losses, while pernicious, have at least been predictable. Jellinek will be keeping his eye on Texas to track whether Houston-based oil and gas companies toy with downsizing, but for now, he has to squint to see any signs of trouble.