NEW YORK CITY—The CMBS delinquency rate's trip through gently rolling hills took a sharp upward turn in June, as Trepp LLC reported Friday that the rate experienced its steepest climb in more than five years. The 28-basis point increase to 5.75% was the biggest rise in the delinquency rate since March 2012.
“After months of marginal increases, the 'wall of maturities' finally took a meaningful toll on the CMBS delinquency rate,” says Manus Clancy, senior managing director at Trepp. “June's climb is well below the rate increases regularly seen in 2010, but the reading should still be anticipated to move somewhat higher through the rest of the summer as pre-crisis loans reach their maturity dates.”
Seven years ago, monthly increases of 40 bps were not uncommon for the CMBS delinquency rate. Moreover, the late-pay rate itself is still below the peak of 10.34% seen in July '12.
“The incline in the delinquency rate during this wall of maturities window has only been a fraction of what many expected a few years ago,” according to Trepp. “At that time, worries were plenty that many 2007 vintage loans would fail to pay off when they reached their maturity dates.” Yet Trepp notes that the delinquency rate has climbed in 13 of the past 16 months, and is now 115 bps higher than the year-ago level.
By one metric, that of newly delinquent loans, June's increase was in line with the monthly increases seen in '10. The month saw $2.4 billion of loans become newly delinquent, putting 58 bps of upward pressure on the late-pay rate. Offsetting that were $400 million in loans that were cured last month as well as $1.3 billion in loans that were resolved at a loss or at par.
All five major property types saw increases in their delinquency rates during June, says Trepp. The month's biggest increase was registered by multifamily, with a 110-bp jump to 3.92%.
As a result, multifamily segment is no longer the best performing major property type. For the moment at least, that distinction belongs to lodging, which registered the smallest monthly increase in delinquencies, 11 bps, ending June at 3.53%.
At the other end of the spectrum, office delinquencies rose 21 bps last month to 7.46%. Industrial delinquencies spiked 20 bps; at 7.57%, industrial is the worst-performing property type. Between the two ends of the spectrum sits retail, which rose 15 bps to 6.65%. Aside from multifamily and hotels trading places, the ranking from worst to best performer by property type is the same as it was in June 2016.
Given that office currently has the second highest delinquency rate among property types, it's worth noting that office exposure in conduit/fusion CMBS deals remains elevated. S&P Global Ratings said Friday that the percentage of office properties fell to 40% in the second quarter from 46% in Q1 but is still up versus last year's average of 29%.
This high number was attributed in part to dropping retail exposure, which bounced back somewhat at 25% from Q1's 22%. However, S&P says retail exposure remains below the full-year 2016 average of 30%.
Also elevated, albeit down slightly, is the concentration of full-term interest-only loan exposure: 43% in the pools that S&P reviewed for Q2, compared to 46% in Q1. S&P's view is that full-term IOs entail lower recovery assumptions, because although the lower payments during the loan term “somewhat reduce term default risk” by inflating the debt service coverage ratio, “the lack of amortization raises maturity/balloon refinancing risk considerably.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
