Special Servicing Rate Tops 7% and Retail Is a Reason

Another month, another increase in the special servicing rate, according to Trepp. Between January and February, it rose to 7.14%, the first time in nearly three years that it topped 7%. The same time in 2023, the rate was 5.18%, while at 6.67% six months ago.

Split that into CMBS 1.0 and CMBS 2.0+ and the respective rates are 23.40% and 7.03%, showing the more conservative underwriting of the latter. And the increases are largely a factor of three property sectors: office, mixed-use, and retail.

Office/? Sure, seems reasonable. Mixed-use? Maybe. But retail?

That was supposed to be the comeback kid. In the January Beige Book, the Federal Reserve found that a number of regions saw improvement in retail. The same was true in the March Beige Book.

In a recent report, DoubleLine said that retail has done better than many expected since it took major hits during the pandemic. There’s been a restriction of new supply since the global financial crisis. Even before the pandemic, there were valuation resets. The result has been “the highest rents and lowest vacancy levels in decades.” Local presence has become even more important as retailers have combined e-commerce with brick-and-mortar locations that help support distribution. The negative standout are lower-quality malls. They will continue to face decline and bad futures.

JLL recently reported that improvements in foreign and domestic tourism was giving urban corridor retail a boost.

But not all things are positive. January retail sales, which came out mid-February, were $700.3 billion, down 0.8% from December 2023, although up 0.6% from the previous January. Expectations were for a 0.2% month-over-month fall. “This slowdown was widespread as nine of the 13 categories showed falling sales during the month,” Sam Millette, Director of Fixed Income for Commonwealth Financial Network, wrote in a prepared statement at the time.

“This month, the retail special servicing rate climbed by 44 basis points, while office and mixed-use both saw increases of 30 and 22 basis points, respectively,” Trepp wrote. “The office rate reached 10.04% in February, the first time since it has entered double-digits since 2013.” The special servicing rate was 9.81% in February 2024. That was down from 10.73% a year ago.

The special servicing rate for CMBS 2.0+ was 9.36%, down a year ago from 10.09%. But for CMBS 1.0, it was 61.82%, down from 66.93%. “Retail properties accounted for 41% of the overall transfer balance compared to office’s 35%, spread across six fewer loans,” they wrote. “Furthermore, the two largest loans to newly transfer in were both collateralized by retail properties, and together represented just under 25% of the entire month’s balance.”

What this all means for retail going forward is impossible to know yet, but it suggests that caution might be smart.