Market Insights

CMBS Delinquency Rate Expected to Stay at Post-Crisis Lows, but Retail Remains a Concern

CMBS delinquencies have fallen to post-crisis lows as the strong flow of originations that kicked off 2018 and continued through June outpaces the number of problem loans.

The delinquency rate hit a post-crisis low of 2.24% in April and is down 90 basis points from a year ago, Morningstar Credit Ratings said in its CMBS third-quarter outlook published earlier this month. And the investment research and management company does not expect much to change in the near term, saying it believes the rate will hold below 2.5% for the rest of the year.

“Delinquencies from deals issued from 2010 through 2018 represent just 0.3% of the CMBS universe, while delinquent pre-crisis loans account for 1.9%,” it said.

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Most of the CMBS originations this year, according to Morningstar, appear to be single-asset, single-borrower CMBS deals. Office loans, including on many trophy properties, it noted, accounted for about 29% of volume in the first half.  

Yet, while delinquencies seem to be in check, Morningstar said the ongoing problems in retail are likely to increase the number of watchlist loans as continued bankruptcies further increase vacancy rates. Citing Bon-Ton, which began liquidation sales in April, and Toys “R” Us, which closed its last U.S. store on June 29, Morningstar said it also is worried about retail anchors such as Macy’s, JCPenney and Sears/Kmart, which are continuing to shutter shops.

Nevertheless, Morningstar expects the number of mall defaults to decline this year because they tend to default at maturity and fewer are scheduled to mature in the next few years: “As long as cash flow remains above break-even on these assets, mall owners have little incentive to hand properties back to their respective trusts prior to loan maturity and will collect cash flow until then,” Morningstar’s Steve Jellinek wrote in the report.

He attributes the growing appetite for CMBS to “the ease of re-underwriting the collateral, better credit enhancement and the higher-quality assets backing the dealsת” but also says it is being driven by borrowers looking to lock in low rates as the Fed remains in a tightening trend.

“Meanwhile, a growing number of yield-hungry investors tied to large projects too capital intensive to finance via other lending vehicles will likely turn to CMBS,” the report concluded.

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