The CMBS delinquency rate has steadily improved since a peak in June, but some asset classes are keeping the overall rate high. A new report from DBRS Morningstar looks closely at the CMBS delinquency rates from the last year, and found that retail and hotel properties could be hindering a recovery.
Overall, the CMBS delinquency rate reached a high of 5.88% in June and fell 148 basis points to 4.45% in December. These numbers aren’t as catastrophic as they might seem. During the height of the financial crisis, the CMBS delinquency rate climbed to 8.53%. More good news: the rate has declined steadily across all asset classes since June.
Despite the positive downward trend, retail and hotel delinquency rates are still startlingly high. In June, retail delinquencies accounted for 17.86% of the total market, down to 12.78% by December. For hotels, the delinquency rate fell to 19.87% in December, down from a high of 23.89% in June.
These numbers may not accurately represent the severity of the delinquencies. DBRS Morningstar notes that many distressed retail and hotel properties are still benefitting from forbearance. These loans are at risk of slipping into delinquency at any time. As forbearance policies end, there could be an increase in CMBS delinquencies or at least more pressure on retail and hotel owners to slip into default
Despite the potential downward pressure from shadow distressed loans, DBRS Morningstar expects delinquency numbers to continue to trend down through mid-2021. With vaccine distribution and renewed confidence, consumers could return to shops and begin to travel again. As a result, retail delinquency should fall to 10% by the middle of the year, and hotel delinquencies should shrink to 15%.
Other asset classes have found footing during the pandemic. The office delinquency rate is 2.2%, and multifamily and industrial are at a low .8% and .7%, respectively. Multifamily and industrial are expected to be stable through 2021, but office could face fundamental changes due to the pandemic. DBRS Morningstar anticipates demand could fall 20% in the next year, putting upward pressure on the delinquency rate. It is expected to rise to 3% to 4% in 2021.
New CMBS activity has also been hampered during the pandemic. Kroll Bond Rating Agency found that CMBS loan volumes totaled approximately $55 million at the end of 2020, fall below the $95 million expected in the fall of 2019. This is an eight-year low for CMBS issuances.