Damaged Delinquency Rate Recovery Will Take a While

Improving delinquency rates for most commercial real estate over the first half of the year can be looked at favorably, but there are signs that the path to recovery to the norm may be protracted over a longer period. 

According to the September data set from Trepp’s Anonymized Loan-Level Repository (T-ALLR), the office delinquency rate has risen to 0.9%, up from its pre-pandemic 0.1% rate. 

Similarly, the multifamily delinquency rate has risen to 0.6%, from 0.2% before COVID-19 hit in early 2020. The industrial delinquency rate is a very low 0.1%, reflecting the strength of the sector through both the recession and recovery. 

Overall commercial real estate delinquency rates are declining after a modest rise in 2020, but individual property sectors – such as the hardest-hit, lodging and retail – are experiencing much higher delinquency rates as a result of the intense recession during 2020. 

Furthermore, banks’ risk ratings indicate regional and property type concerns that are not uniform. The 2020 recession is also being felt in the lower volume of new commercial mortgage originations. 

Delinquency rates for the other major property types are below 1%. 

The T-ALLR data consists of bank balance sheet loan data, a diverse set of loans totaling over $160 billion sourced from multiple banks. 

Lodging and Retail Delinquency Rate Worst

CRE mortgage delinquencies hit a recent peak of 1.3% in Q4 2020, as the pandemic disrupted economic activity across a broad range of geographies and industries. 

Since year-end 2020, the economic recovery that began in the second half of last year has helped bring mortgage delinquency rates down, with modest improvements in both Q1 and Q2 2021. As of Q2 2021, the overall CRE delinquency rate stood at 1.1%, while the noncurrent (more serious delinquencies) rate stood at 0.9%, both still above their pre-pandemic levels. 

The highest delinquency rates are in the lodging and retail property types, the two sectors within commercial real estate that were most severely impacted by the pandemic. Delinquency rates for both lodging and retail – at 11.9% and 4.9%, respectively – edged up slightly in Q2, after showing noticeable improvement in Q1. The uptick in Q2 is a reminder that the path to recovery may be protracted over a longer period. 

When the pandemic hit in the first quarter of 2020, lenders were allowed to offer forbearance to COVID-impacted borrowers. If a borrower received forbearance, the loan would not be marked as delinquent. However, the lender was expected to update its risk rating on the loan, to reflect the lender’s expectations for ultimate re-payment of the loan. 

So, while delinquency rates have shown a more muted response to the economic disruption of 2020, risk ratings started to adjust immediately. Lenders in the Mid-Atlantic have elevated concerns about risk across all three of the largest loan types. More than 30% of loans – by loan balance – in the multifamily, office and retail property types carry risk ratings of 6 or higher. 

Risk ratings for office loans have increased, as the long-term prospects for the sector have become less certain. The large and commute-dependent New York office market is the source of the Mid-Atlantic’s high 31% proportion of criticized loans.