CHICAGO—In this, the year of 10-year maturities of 2007-vintage CMBS transactions, Morningstar Credit Ratings LLC expects the delinquency rate to rise after finishing 2016 with a year-over-year decline of 43 basis points. This assessment goes hand in hand with the ratings agency's projection of a substantial drop in the payoff rate for securitized commercial mortgages.

“With many of the maturing loans overleveraged and lenders being more conservative, we expect the maturity payoff rate to fall further because loans issued in '07 were often originated under more aggressive terms than those of 2006-vintage loans,” according to a Morningstar report. “We project that only about 50%-60% of the nondefeased loans coming due in 2017 will be able to refinance, down from 75.6% in 2016.”

At year's end, the delinquent unpaid balance of CMBS amounted to $23.86 billion, up $357.1 million from the prior month and down 12.2% from a year ago. Also in December, the volume of newly delinquent loans rose to $1.65 billion from $1.33 billion the previous month. More than 50% of the newly delinquent loans were from of '07 vintage, nearly double that of the second-largest vintage, as loans originated in '06 were 25.6% of the newly delinquent balance.

By property type, office and retail, which combined represent 72.5% of the delinquent unpaid balance of Morningstar-rated loans, remain the weakest. For metropolitan statistical areas, Morningstar expects Washington, DC and Chicago, which have the highest volume of delinquent CMBS, to remain among the weakest metro areas on account of underperformance  by suburban loans.

“Compounding the issue, the Chicago MSA is suffering subpar price performance as real estate values in this market continue to lag the national average, according to CoStar Group Inc.'s commercial price index,” says Morningstar.

Specially serviced exposure rose for the first time in four months, accelerating by $153.3 million to $28.49 billion, the largest monthly increase since June of last year, according to Morningstar. The increase was driven largely by the $130.4-million Connecticut Financial Center loan, for which Morningstar projects a loss of $60.4 million.

While the '16 payoff rate for CMBS deals was in line with Morningstar's expectations, it also fell below the 85.1% payoff rate for 2015 maturities. Some $82.82 billion in CMBS loans matured last year, and, of that amount, 5,679 loans with an unpaid balance of $62.62 billion matured and paid off.

More than 950 loans with a UPB of $12.38 billion were delinquent, while another 308 loans with a UPB of $5.15 billion remained active and were reported as current. Roughly $2.67 billion in maturing CMBS loans were liquidated, Morningstar says.

Morningstar's prediction of a decline in the payoff rate this year is based on analysis of loan-to-value ratios. About 49% of loans maturing this year have LTV ratios below 80%, says Morningstar, noting that “LTV is a reliable barometer of a loan's likelihood to pay off on time.”

Even as a combination of lower CMBS issuance, tighter underwriting standards and “the uncertainty around risk-retention rules that took effect in December” also may hamper refinancing borderline '07 loans into CMBS deals, Morningstar says that selection bias will further stress the repayment rate, since many of the stronger-performing '17 maturing loans have already paid off. “Indeed, CMBS loans totaling $77.56 billion are scheduled to mature this year, down from the year-earlier figure of $104.21 billion,” the report says.

Instant Insights /

Higher Delinquencies, Lower Payoffs Seen for CMBS

Related Stories

Recommended For You