A Pipeline of Retail And Hotel Foreclosures Is Forming

The rate at which retail and lodging loans are moving into foreclosure is far short of the levels predicted when the pandemic gripped the country last March, with just 12 loans representing $270 million of outstanding balance officially beginning the process.

A new analysis from Moody’s Analytics REIS also shows that the rate at which loans for those sectors are being modified has also decreased markedly after reaching a peak early last summer. A temporary spike in the rate in December yielded to a sharp decrease early in 2021.

Moody’s Thomas LaSalvia and David Salz note that “we typically see a lag between when a loan is modified and when the trustee reports the modification,” typically in the range of 30 to 90 days. “Nonetheless, we can be confident that the decline in new modifications in January and February is real, although the figures for March through May might change. This decline in the rate of new modifications may indicate that special servicers are finding that modifications may not be sufficient to cure the remaining troubled loans. In those cases, special servicers may opt for foreclosures.”

The pair also note that CMBS servicer commentaries suggest there may be a “significant pipeline” of properties that may go through foreclosure. More than $6 billion worth of retail and lodging loans had servicer comments mentioning foreclosure, deed-in-lieu, or REO in May, according to Moody’s analysis, and of that number about $3.6 billion were retail loans and the another $2.4 billion were lodging loans.

“These figures clearly dwarf the $450 million of loans that were newly foreclosed or moved to REO in May,” Salz and LaSalvia write, noting that about $2.3 billion had comments indicating a deed in lieu or that the servicer would pursue a dual track modification and foreclosure.

Properties heading toward traditional foreclosure tend to be clustered in the Northeast, while the Sun Belt and West are faring better.

“The limited extent of foreclosures up to this point has multiple causes including slow and uncertain real estate markets, foreclosure moratoriums, and a wait-and-see approach that some loan servicers have taken over the past year,” Salz and LaSalvia note. “Price discovery is key, and this process requires a robust transaction market. Quarterly transaction volumes are still approximately 30% below pre-pandemic levels for retail and 15% for lodging. Lingering concerns of further rent and occupancy declines in retail, and a lack of clarity as to the future of business travel are still exerting pressure on the capital markets.”

Moody’s Analytics CRE predicts retail rent declines will remain above 5% for 2021, and revenue per available room for hotels is likely to only reach 70% of pre-COVID numbers.