NEW YORK CITY—By one metric, US CMBS last year saw its best performance since before the capital markets crisis. Fitch Ratings said Monday that the annual default rate for securitized commercial mortgages fell to 0.9% in 2013, the lowest level since 2008.
The default rate last year was 26% lower than in 2012 and down 75% from the peak in 2010. “The broader commercial real estate markets are stabilizing and healthy new CMBS issuance volume is providing ample liquidity,” says Mary MacNeill, managing director at Fitch. New issuance levels for conduit loans hit a five-year high, thus allowing many loans to refinance, Fitch says.
In all, 353 loans totaling $5.4 billion defaulted last year, compared with 557 loans totaling $7.3 billion in 2012. That represents a 37% year-over year decline in the number of loans and an even steeper dropoff from 2011, when 950 loans totaling $13.8 billion went into default. Default levels last year tapered off as the year progressed, with 37% of the defaults occurring in the first quarter, 26% in the second, 21% in the third and 16% in the fourth.
Cumulative defaults in ‘13 were 13.5%, totaling $84.2 billion, compared with 13.4% totaling $78.8 billion in 2012, and 12.7% totaling $71.4 billion in 2011. The Y-O-Y increase in cumulative defaults was only 7%, smaller than in previous years due to both strong new issuance and lower annual defaults.
CMBS loans from the last cycle’s peak—2007—have led the default parade each year since 2009, and last year was no exception, with 47% of new defaults. Fitch notes that defaults in other vintages were much lower, with 29% from 2006, 15% from 2005, and 4% or lower for all other vintages.
For the third consecutive year, office defaults led all property types in ’13 with 48% of total new defaults, or $2.6 billion. MacNeill says office loans will remain under pressure “due to high unemployment, slow job growth and tenants requiring less space per employee.”
Retail followed with 25.4%, or $1.4 billion. Due to the default of two large portfolios, industrial made its way into the top three at 13.9%, or $749 million. Multifamily and hotel defaults were 5.7% and 5.2% for respective tallies of $308 million and $283 million.
Last year saw the first defaults of loans from the so-called CMBS 2.0 vintages (2010−2013) occurred, as six loans with a balance of $54.1 million, or 0.1% of total CMBS 2.0 issuance, defaulted in ‘13. The majority of these defaults were related to idiosyncratic events, such as tenants vacating before a lease ended or sponsor issues. Long term, Fitch expects CMBS 2.0 loans to follow a default curve similar to vintages outside of the 2005−2008 range.
In the near term, Fitch says it expects the amount of new defaults to hold steady in 2014 as the CRE market is recovering post financial crisis. Cumulative defaults, currently at 13.5%, are predicted to be relatively stable and end the year under 14%, based on both stable default levels and continued strong new CMBS issuance volume.