The TREPP Commercial Mortgage-Backed Securities (CMBS) Delinquency Rate indicated its sharpest spike in nearly three years over the course of April 2020—jumping nearly 22 basis points since March to a new high of 2.29%.
This rate of delinquencies hasn’t been seen since June 2017, when the market was still being impacted by the maturation of 2007 mortgages. Although a rise in the rate of delinquencies was likely anticipated by the majority of industry experts, the relative modesty of the increase caught many off guard.
Presently, market players are keeping tabs on the loans transferring to special servicing, seeing this as an indication of future activity. The proportion of mortgages with the special servicer was 4.39% in April, up from 2.83% a month prior. 2.27% of all lodging mortgages before the April servicer numbers came in were in special servicing. After the April data was tabulated, that mark exploded to 11.42%. The overall total dollar amount of special servicing loans jumped from $14.1 billion to more than $22 billion. The incoming rate of loans to the special servicing sector experienced similar growth—nearly a ten-fold increase from March to April.
The majority of CMBS debtors negatively impacted by COVID-19 in terms of their inability to timely submit mortgage installments will not be represented in the TREPP data until the end of the May payment cycle. This is due to the fact that a significant percentage of the borrowers were able to make their payments due at the beginning of March, as its deadline was prior to the widespread economic shutdown due to the coronavirus. The majority of these borrowers failed to make their payments in April, however this did not mean their loans were delinquent. Alternatively, they were deemed as being in either a “grace period” (i.e. “Status A”) or “beyond a grace period” (i.e. “Status B”) in the servicer reports. If these borrowers subsequently miss their May 1 installments, they will be classified as 30-days delinquent unless granted forbearance.
In the past, the Status A/B classification has been largely overlooked by CMBS report users. These mortgages typically accounted for no more than 2% of the entire market and the majority of them were either notes about to transition to 30-days delinquent or loans that would become current in the near future. Due the historically miniscule percentage of loans in the Status A/B categories, industry experts never were overly concerned with their potential impact on the market.
However, it is now impossible to ignore Status A/B loans considering that retail loans in this classification rose six-fold in April and for hotel properties, it jumped over ten-fold. This data should now be considered as clear indications of how the delinquency rate could rise to in May as well as for the remainder of the year. At the same time, borrowers who are granted forbearances are expected to put a cap on the rise in delinquency rate eventually.
The percentage of A/B loans was measured at slightly over 7.6% at the start of April. If the entirety of these mortgages became 30 days delinquent in May, then the total rate of delinquency would be 10% greater than its current mark. From a year-to-date perspective, the collective nationwide CMBS delinquency rate is five basis points lower, whereas the portion of loans that are over 60 days delinquent, in foreclosure, REO or nonperforming has spiked to 2.11%–up a total of 11 basis points for April. By property type, the industrial delinquency rates rose slightly—up a single basis point to 1.36%, while the retail delinquency rate experienced the sharpest decrease, dropping nearly 22 basis points to 3.67% and making it the worst performing major property category.