CMBS Resolution Activity Set To Pick Up In Late Second Half

CMBS resolution activity is set to pick up late in the second half, Fitch Ratings predicts in its latest annual US CMBS Loss Study.

“The ongoing vaccine rollout portends a rise in both leisure travel and a widespread return of commercial activity, both of which will have a positive net effect on CMBS,” said Senior Director Karen Trebach in prepared remarks.

But she cautioned previously struggling properties—particularly in the retail sector—are not expected to successfully emerge from the pandemic economy, while others, like those in the hotel sector which experienced unprecedented cessations in revenues, are expected to survive and return to pre-pandemic levels as conditions improve.

She indicated re-pandemic levels of bricks-and-mortar shopping are not likely to be seen by stores as consumer behavior continues to evolve.

The Fitch Ratings executive added regional malls are also seeing their troubles exacerbated by government shutdowns and additional economic stress caused by the pandemic.

The pandemic caused a slowdown in 2020 loan dispositions, with just under $2 billion in CMBS loans resolved with a loss last year compared to $5.3 billion in 2019. Average loss severity for loans that resolved with losses in 2020 was 55.5%, down slightly from 57.8% in 2019. Looking at the longer-term perspective, the cumulative average loss severity for loans resolved with a loss remained flat at 47.1% in 2020 from 46.6% in 2019.

Loss severities among retail, hotel and multifamily properties were similar at 59.4%, 59.2% and 59.0%, respectively. Hotel properties have reverted to the mean from 2019’s sharp spike (75.9%), and office and industrial losses have also decreased from 2019. Other property types (retail, multifamily, and other) exhibited higher loss severities in 2020.

In a sign of recovery the Trepp CMBS delinquency rate marked its eleventh straight monthly decline in May, posting its biggest drop in three months to 6.16%.

That figure represents a decrease of 36 basis points from April’s number.  And the percentage of loans with the special servicer fell to 8.65% in May from 9.02% in April.

Trepp’s Manus Clancy termed the percentage of delinquent loans “impressive.”

Noting that hotel alone has seen its rate drop by 10 percentage points, Clancy predicted that as the economic recovery continues, those numbers should continue to fall.

And in March, Fitch reported the CMBS delinquency rate dropped 23 bps to 4.10%. with both resolution activity and new issuance volume remaining strong. 

The firm noted the pace of new delinquencies had slowed considerably.