CMBS Special Servicing Rates Continue to Sink

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The number of commercial mortgage-backed securities (CMBS) loans requiring special servicing continued on a downward trend last month, indicating improving market conditions, according to Trepp data.

The Trepp CMBS Special Servicing Rate fell by 18 basis points month-over month to 9.42% in March, marking the monthly reading’s sixth consecutive decline since September. Trepp noted that the improvement — compared with a 10.48 percent U.S. CMBS special rate six months ago — is attributable to the balance of loans exiting special servicing across most property types exceeding that of new loans transferring in.

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Overall, 35 CMBS notes totaling $1.13 billion were newly sent to the special servicer in March, down from $1.19 billion across 51 notes in February. The percentage of loans in special servicing dipped slightly across all sectors, with the exception of office properties, which climbed 17 basis points (bps), largely due to the transfer of a $300 million loan behind One California Plaza, a 1 million-square-foot office complex in Downtown Los Angeles.

Retail saw the biggest improvement in its Trepp monthly reading in March, at minus 0.44 bps, aided by a $635.7 million reduction in its special servicing balance compared to February. Lodging and retail comprised 35 percent and 34 percent of the special servicing transfer balance, respectively, with office accounting for another 26 percent.

The largest CMBS loan moved to special servicing in March was a $135 million deal backed by the Aruba Marriott Resort & Stellaris Casino. The next largest loans that were transferred into the special servicing bucket included a $127.9 million transaction behind Deerbrook Mall in Humble, Texas, and $111.1 million of debt for 600 Broadway in Manhattan.

Trepp noted that the percentage of grace period CMBS loans also improved last month, falling 2 percent for the first time since the start of the COVID-19 pandemic, due to increased vaccinations, relaxing virus restrictions and strong job gains. This indicates, according to Trepp, that the pipeline for distressed loans should remain “tempered” in the ensuing months.

The overall special serving rate on legacy CMBS loans also showed improvements for March, dropping 9 bps to 47.44 percent. The total outstanding balance of legacy loans fell to $4.81 billion in March, compared to February’s total of $4.83 billion.

While the trajectory of CMBS loans transferring to special servicing is moving downward, the rate remains well above the 2.83 percent rate measured one year ago at the onset of the COVID-19 pandemic.