NEW YORK CITY—Three years into the revival of CMBS, securitized commercial mortgages have seen their first defaults from the so-called CMBS 2.0 generation. Fitch Ratings says nine loans with a combined balance of $74.9 million went more than 60 days past due in 2013, representing 0.06% of total CMBS securitization.
These included six conduit loans totaling $54.1 million and three loans in agency deals that totaled $20.8 million. Seven of these defaults occurred in the multifamily sector, and most were due to tenant bankruptcies and financially challenged sponsors, according to Fitch director Brook Sutherland.
“The largest CMBS 2.0 default occurred when a major office tenant vacated before their lease expired,” says Sutherland. “The multifamily CMBS defaults were mostly on smaller properties that, despite adequate property performance, were chronically late with payments possibly because of organizational problems at the sponsor level.”
That default was a $15.4-million loan, securitized as GSMS 2011-GC5and secured by a complex of six office/flex buildings aggregating 296,134 square feet in the Dallas suburb of North Richland Hills, TX. It went into special servicing in May of last year, due to imminent default. The largest tenant at 42.6% of space, ATI Schools & Colleges, vacated the property in February 2013 prior to the expiration of its lease.
For CMBS of recent vintage, the risk of term defaults remains low, according to Fitch. “Due to the low interest rates of the loans originated in CMBS 2.0, balloon risk remains the bigger concern,” the ratings agency says in a report. “If interest rates are substantially higher at maturity, loans originated with higher LTVs may have difficulty refinancing unless there is some appreciation in cash flow or meaningful amortization.”
In any case, the default rate remains low by historical standards. When the 2005-2007 vintage loans are taken out of the equation, the average annual default rate for CMBS 1.0 is approximately 0.7% in the first three years of loan seasoning. For CMBS 2.0, thus far it’s been less than 0.02% per year. However, Fitch says it expects CMBS 2.0 defaults to follow a default curve similar to historical CMBS levels, “especially as higher leverage and more aggressive underwriting have taken hold over the past year.”