CMBS Delinquency Rates Finally Fall to Pre-Pandemic Levels

CMBS delinquency rates in August 2022 were 2.98%, finally falling below 3% for the first time since the pandemic, according to a new report from Trepp. A year before they had only just dropped under 6%. It’s been six months since they went below 4%.

The all-time high for CMBS delinquency was in July 2012, when it hit 10.34%. The high for the pandemic was 10.32% in June 2020.

The percentage of loans that were at least 60 days delinquent, in foreclosure, REO, or non-performing balloons was 2.89%, which does suggest that for a large percentage of delinquent loans, most face some serious problems. In a further breakout, 100 basis points of the total were properties in foreclosure. “If defeased loans were taken out of the equation, the overall 30-day delinquency rate would be 3.14%,” Trepp wrote.

Commercial mortgage-backed securities are an important part of CRE. By bundling commercial mortgages into bond-like financial instruments and providing fixed-income to investors in return for up-front payments, the CMBS structure helped lenders free up cash for more investing.

The Trepp analysis said that the drop in delinquency rates shouldn’t surprise. Hotel and retail CRE segments that were badly hit by the pandemic “continue to see steady improvement each month as loans in those categories cure and/or pay off.”

Lodging delinquency was 5.18%, down from 12.05% a year before. Retail is down to 6.45% from the previous year’s 10.43%.

Office still faces challenges because of the ongoing work-from-home pressures, including the desire of many employees to keep working from home. However, the impact “will take years to play out as a result of most firms being locked into five- and 10-year leases,” the firm added. Currently, the office delinquency rate is 1.50%; a year ago it was 2.12%.

According to Gerard Sansofti, an executive managing director as well as debt and loan sales platform leader at JLL who spoke to GlobeSt.com in February 2022, the structures of CMBS issuances changed significantly for the better after the general financial crash in 2008.

Projects are also less dependent on the structures. “CMBS used to be over 50% of the market,” Sansofti said. “Today it’s 10% to 15% of the market. Banks have much more capacity. Insurance companies have much more money in as well. I don’t see the liquidity issue we ran into the last time.”