NEW YORK CITY—Although Fitch Ratings and Trepp LLC both have reported upticks in the delinquency rate for CMBS, both organizations also have some good, if tempered, news to impart about securitized commercial mortgages. Trepp says that substantial progress has been made in scaling the “wall of maturities” down to size, while Fitch cites generally strong property cash flows for so-called CMBS 2.0 deals.

From the beginning of 2015 through the third quarter of this year, almost $190 billion in US CMBS loans have been paid off or liquidated, says Trepp. The tally represents a sizable portion of the $300-billion wall of maturities, comprised of CMBS loans with final payment dates between '15 and 2018.

“Strong market fundamentals coupled with recent increases in property income levels have allowed borrowers to seize available capital and refinance loans prior to maturity,” says Manus Clancy, senior managing director at Trepp. “However, challenges may arise in 2017 as many loans that mature next year are over-leveraged. With rising Treasury rates and a Fed-imposed rate hike possibly impending, borrowers might find it harder to land refinancing.”

Of the almost $190 billion in matured CMBS that was liquidated from over a 21-month period, roughly 55% of the balance was paid off prior to maturity. An additional 29.3% of that total was resolved at, or within two months of maturity, while 3.83% of the debt was paid off after the loan was due.

Still to come are $24.1 billion in CMBS due to mature by year's end, $112 billion coming due in 2017 and $17.6 billion maturing in '18. Loans backed by retail and office properties account for the largest remaining portion of the wall of maturities, as those two sectors combine for $86.8 billion, or more than half the total debt maturing in that time frame. However, retail and office also represent the highest percentage of delinquent loans set to mature.

Seven years into the CMBS 2.0 era, the strength of cash flows on the current generation of CMBS needs to be weighed against the impact of a peaking market on property performance, says Fitch. “Property performance has flourished over the past five years and cap rates are at an all-time low, resulting in values reaching an all-time high,” according to the ratings agency. “But it's only a matter of time before the commercial real estate market reaches an inflection point.”

Although Fitch says it doesn't see rapid performance declines occurring, a more likely short-term scenario entails net income levels turning negative. “This could squeeze a borrower's ability to service the debt if their loan has been aggressively underwritten,” according to Fitch.

“Questions continuously arise over the differences in underwriting practices between this current cycle and the one from nearly a decade ago,” says a report from the ratings agency. “While pro-forma cash flow analysis has not returned, current underwriting practices may not be sufficient to properly address the peaking real estate cycle.” Accordingly, Fitch has been increasing its vacancy projections from those being underwritten by the lender across all property types.

Using differing yardsticks, Trepp and Fitch both say that CMBS late-pays ticked upward by a few basis points in November. The Trepp CMBS Delinquency Rate rose to 5.03% in November, up five bps from October. It's the first reading of 5.0% or more since December of last year, and is now just 10 bps lower than the year-ago level and 14 bps lower since the beginning of the year. Fitch reports a four-bps increase in delinquencies to 3.29% for November. Separately, the Mortgage Bankers Association reported last week that CMBS delinquencies increased by 19 bps over the course of the third quarter to reach 4.23%.

“The recent uptick in delinquencies has been anticipated for a long time, and we believe it's encouraging that the incline has been relatively gentle,” Clancy says. “However, the sharp rise of the 10-year Treasury yield over the last month could make the refinancing of loans with marginal debt service coverage ratios harder and push delinquency levels up faster.”

Instant Insights /

The CMBS Maturity Wall Is Scaling Down

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