Delinquent CMBS Loans Continue to Decline

With mountains of real estate debt coming due in the next three years, borrowers appear to be taking advantage of favorable market conditions to prepay loans tied to commercial mortgage-backed securities (CMBS).

The CMBS delinquency rate, which includes loans that are 30 days or more past due, fell to 5.66 percent in January, compared with 7.25 percent a year earlier, according to commercial real estate consulting firm Trepp LLC. It marked the 18th monthly decline in the past 20 months.

“A lot of the impetus for resolutions is coming from the huge wave of maturities” that are coming due, said Sean Barrie, research analyst at Trepp. “We see a high number of defeasances because borrowers want to pay off that loan and refinance at a better rate,” he added.

Trepp estimates that about $300 billion in CMBS loans are scheduled to come due between 2015 and 2017.

Alan Todd, CMBS strategist at Bank of America Merrill Lynch, said prepayment of loans is prevalent, even if that involves a penalty, due to lower interest rates, loosening underwriting standards and higher property values.

“There’s a pulling forward of the wall of maturities,” he said. ”It’s going to be nothing more than a foothill by the time we get there.”

According to Mary MacNeill, managing director at Fitch Ratings, the quality of new securities, the so-called CMBS 2.0 and 3.0 issued after 2010, is also playing a part in the declining delinquency rate. “The more recent vintages have been pretty healthy,” she observed.

Overall, MacNeill said she expects the delinquency rate to continue to drop in the near term, even if larger loans that are close to their maturities cause volatility. “For the most part, the market is fairly stable, and liquidity is still available,” she noted.

Todd agreed. “The commercial real estate markets are back and fully functioning,” he said.

Delinquency Rate by Property Type

The CMBS delinquency rate for industrial property dropped to 7.20 percent in January from 10.59 percent a year earlier, according to Trepp data. The delinquency rate for lodging property fell to 4.40 percent in January from 7.35 percent the year before. “Lodging remains the best performing major property type,” Trepp said. Multifamily CMBS delinquencies dropped to 8.81 percent from 10.67 percent a year earlier.

Office delinquencies declined from 7.80 percent in January 2014 to 6.18 percent last month.

The CMBS delinquency rate in the retail sector dropped to 5.60 percent in January from 6.13 percent a year before. However, MacNeill suggested that the sector could experience volatility as owners shed assets in weaker malls and tertiary locations.

Elevated CMBS Issuance Expected in 2015

Conditions remain favorable for more CMBS issuance in 2015, analysts say. “Everyone’s really encouraged by issuance so far this year,” Barrie said. Trepp is forecasting CMBS issuance of about $120 billion in 2015, versus $95 billion in 2014.

Todd said he sees more interest in commercial real estate from insurance companies, banks and government-sponsored enterprises: “There’s definitely plenty of capital around.”

Meanwhile, a side effect of increased issuance, Todd points out, is that underwriting standards will get “slightly more aggressive.”