CMBS Delinquency Rate Drops Past 4%
Separately, Fitch Ratings says the CMBS market is operating in dog years.
NEW YORK CITY–Despite a brief blip in March, the CMBS delinquency rate, as measured by Trepp, has been steadily falling. This month is reached a milestone, breaking through the 4% threshold, Trepp reports. “It’s safe to say that CMBS investors have even more reason to set off some fireworks next week,” it says in its alert.
The overall delinquency rate for US commercial real estate loans in CMBS is now 3.95%, a drop of 17 basis points from the May level of 4.12%. The June 2018 rate is 180 basis points lower than the year-ago level of 5.75% and 94 basis points lower year to date, when the delinquency rate was 4.89%.
The reasons for the ongoing decline have been the continued resolution of distressed legacy debt and the brisk pace of new loans being originated and securitized.
Trepp believes that the delinquency rate could approach the 3% level by the end of the year.
The CMBS is a Market Operating in ‘Dog Years’
Separately, in its 2018 Virtual Investor Video Series for Structured Finance, Fitch Ratings says the current US commercial real estate cycle is operating in dog years, meaning that certain developments are stretching out the usual 10-year cycle.
CMBS Group Head Huxley Somerville said that, like dog years, the current commercial real estate cycle is really worth two years of the old cycle and that we would think of the market as being in year 5 of the cycle, instead of closer to the end.
That said, there are some unusual trends in CMBS given this new understanding of the cycle.
CMBS underwriting, Somerville said, has slowly improved over the last two years after reaching what Fitch deemed its low point in 2015. As a result, CMBS credit enhancement has fallen at a time in the cycle where it might normally have been nearing peak levels.
Also, there are three times as many interest-only loans in CMBS today as there were in 2011, an area of concern for Fitch as they become increasingly commonplace. Somerville said that rising interest rates could negate any benefit of amortization for IO loans since they were originated in a low rate environment.
The one non-surprise at this stage of the commercial real estate cycle is haircuts to CMBS cash flows, which Fitch has nearly doubled since 2011.