NEW YORK CITY-In a sign that the troublesome class of 2007 loans have not yet made the grade, the CMBS delinquency rate has hit a new high in May after steadily creeping up over the last three months. New research from Trepp shows that the delinquency rate is now 10.04%, up 24 basis points from last month (9.8%) and a whopping 67 basis points since February (9.37%), an indication that the rocky CMBS market has not yet reached solid ground.
“It is definitely not exactly as we and others have thought over the last three or five months,” Manus Clancy, senior managing director at Trepp, tells GlobeSt.com, who predicted earlier in the year 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. The good news, he says, is that these loans were “heavily” front-loaded.
“We should see another month or two where we kind of bump along in a negative direction, but after that, we should start seeing the delinquency rate start to level off beginning in the middle of the summer,” he says, noting that the rate could continue to edge up in the next couple of months, but “should see a leveling off in the second half of the year.”
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Currently, $59.1 billion in loans are delinquent, excluding loans that are past their balloon date but are current in their interest payments. In addition, there are $79.2 billion in loans that are in special servicing.
Out of the five major property types, the delinquency rate was driven by large increases in hotel and industrial loans. According to the report, the hotel delinquency rate surged by 172 basis points and is now back over 12%, and the industrial delinquency rate is up 46 basis points and remains the second worst category, going from 11.96% in 2011 to 12.82% currently.
And despite its strength in the overall marketplace, the worst sector, Clancy says, is multifamily, coming in at 15.17%. “On bank balance sheets, multifamily has done pretty well and in the REIT sector, it has done well,” he says, explaining that a large chunk of the 15% is made up of loans that were done like Stuyvesant Town, which holds a delinquent $3 billion loan, amounting to 4% of the total number.
Several other New York loans that have similar business plans – like the Riverton, and the Savoy –which were rent stabilized and converted, also fall into the delinquent category. But the main issue, Clancy says, goes back to the origination date. “You have this issue that so much of the lending was done at the worst possible time for CMBS,” he says. “So much of the CMBS outstanding balance is from that 2006 to 2007 timeframe. Unlike bank balance sheets where you kind of see a nice little distribution between 2001 and 2011. In CMBS, there was a huge super spike in 2006 and 2007, and they were making loans for the worst time in the market.”
On the bright side, Clancy has observed “consistent issuance” throughout the year. “Every month we see a couple of deals, that’s been a positive sign that the market continues to grind its way through,” he says. “I don’t think anybody is doing back flips over the amount of volume that we are going to see,” noting that around $30 to $40 billion worth of loans will be issued by the end of the year, down from peak levels of $200 billion in 2007.
“It is a fraction of where we had been, but we have vastly improved from 2009 and 2010,” he says. “We would love to be at $75 billion or $100 billion, so it is not nearly as good as we had hoped for this far into a recovery, not nearly as bad as it was a couple of years ago. If we continue to see volume inch up month-over-month quarter-over-quarter, it’ll be evidence that the market is slowly but surely healing.”
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