Good and Bad News About CMBS EOY Loan Performance Trends

KBRA pulled together its CMBS loan performance trends in December, closing out 2022. Let’s do the bad new first and then find a bit of a silver lining.

Things have been getting worse for a few months. The delinquency for US CMBS loans rated by KBRA were 2.97%. That’s 8 basis points up from 2.89% in November, which in turn was up 11 basis points from October’s 2.78%. September was even mower at 2.76%.

September was the end of a short trend of decreasing delinquency rates, down from 2.93% in August and 3.09% in July. But the change from May to June was an increase of 15 basis points.

“In this report, KBRA provides observations across our $319.6 billion rated universe of U.S. private label CMBS including conduits, single-asset single borrower (SASB), and large loan (LL) transactions,” the firm reported.

“A total of $1.3 billion of newly delinquent loans were reported in the final month of the year, the same level as last month,” it added. “More than three-quarters of the delinquencies were reported as nonperforming matured balloons—up from 50% in November. In addition, of the $819.6 million transferred to the special servicer this reporting period, over 80% identified imminent or actual maturity default as the reason compared to 70% last month.”

In November, the firm said that it expected a “modest rise” in CMBS delinquencies due to rising interest rates and a questionable economic outcome in the shorter term. It expected that more loans, particularly those near maturity, might transfer to special servicing.

Variation in numbers and short-term trends make it difficult to forecast in changing conditions.

A number of large office building loans led the current and imminent maturity defaults. They include $327.7 million for the Wells Fargo Center (MSC 2019-NUGS); $243.6 million on Republic Plaza (WFRBS 2012-C10 & WFRBS 2013-C11); $130.0 million for Federal Center Plaza (COMM 2013-CR6); $103.7 million on 515 Madison Avenue (WFRBS 2013-C11); and $98.2 million for Gateway Center (JPMCC 2013-C10).

KBRA did note that none of the loans were reported as delinquent during their terms and the assets were geographically diverse, suggesting that this isn’t the result of some localized conditions or phenomenon.

“The refinancing difficulties are likely indicative of capital market disruption owing to the uncertain interest rate and economic outlook, as well as ongoing concerns about remote and hybrid work’s impact on the office sector,” the firm said.

That is in keeping with much of what GlobeSt.com has been hearing and reporting for some time, particularly uncertainty about the future, the need for price discovery that will take some time, and the difficulty many properties face that had been financed at low interest rates and high leverage.