$3.9B in Outstanding CMBS Could Go Back to Lenders

Trepp has pinpointed about $3.9 billion in almost 100 outstanding CMBS loan balances where the borrower has indicated a willingness to turn over the asset to the lender.

Trepp’s research supports the now widespread notion that waves of distress could be coming in hospitality and retail. Trepp highlighted some regional malls, including Westfield Citrus Park in Tampa ($126.4 million current loan balance), Westfield Countryside in Clearwater, Fla. ($95.9 million current loan balance), and Florence Mall in Florence, Ky. ($90.0 million) in trouble. It also listed problem loans with a Sheraton Suites Houston in Houston and the Trumbull Marriott in Trumbull, Conn. ($20.9 million).

A large cluster of problem loans are located between Philadelphia and New York, according to Trepp. Regional malls represent more than one-quarter (26.%) of the loans where borrowers could potentially hand the keys back to lenders. Limited-service and full-business service hotels each represented 18.09 of those loans. They were followed by community shopping centers (8.51%) and extended stay hotels (6.38%). 

The list includes some loans with balances above $200 million. Trepp’s Manus Clancy and Catherine Liu emphasized that its list represents what the situation looked like on October 21, 2020, and that what might appear to be a “deed-in-lieu (DIL) pending” can quickly reverse course. The list, which was created by reading special servicer comments, includes loans for which the borrower has indicated a willingness to transfer the property to the mezz lender. It did not include loans that showed the asset as REO.

Trepp also mentioned that the prospect of a deed-in-lieu is sometimes used as a negotiating tactic. Just because the term is used does not ensure that a property will go REO.

Earlier, Trepp’s Russell Hughes wrote that some borrowers might be strategically defaulting on their loans. He pointed out that the delinquency rate for large balance loans is much higher than those with smaller balances. The borrowers for those larger loans are usually more sophisticated and less cumbered by recourse or guarantees, which makes strategic defaults more rational, according to Hughes. 

“While there are certainly some borrowers who no longer have the ability to make payments, the gap in the delinquency rate relative to the broader portfolio is indicative that many of these borrowers decided that because of current circumstances, they will be unable to extend or refinance their existing loan at maturity and therefore have opted to stop making payments in advance of their maturity date,” Hughes writes.