Report: Covid's Impact on CMBS Loans Hits Hotel and Retail Hardest

As the Covid-19 crisis places extraordinary stress on commercial real estate, distressed CMBS loans are being transferred into special servicing at an unprecedented rate.

A new report from Moody’s Analytics and loan special servicer CWCapital examines the crisis’ impact on commercial mortgage-backed security loans by property type, finding that fully 96% of the loans transferred to special servicing from March 1 through the third week in May were for hotel and retail properties.

The balance of CMBS loans in special servicing had reached $32 billion by May 19, with a $9.6 billion increase for the May remittance period, according to the report, which said the volume of distressed loans shifted to special servicing in such a compressed time period was unprecedented.

By comparison, the volume of CMBS loans in special servicing during the financial crisis a decade ago peaked at $92 billion in mid-2010, which was 2.5 years after the recession began in Dec. 2007, the report said.

Unsurprisingly, it added, distressed CMBS loans have been concentrated in the hospitality and retail sectors. CWCapital reported that 7%, or about $560 million, of an $8 billion loan balance associated with relief requests had transferred to special servicing. Fully 84% of relief requests came from retail (44%) and lodging (40%), with CMBS loans for office and mixed use making up 5% each of the requests.

Even with reopening efforts underway, “it is unlikely that the hospitality and retail sectors will bounce back swiftly,” the report said, forecasting that the volume of distressed CMBS loans likely will continue to rise through 2020 at least.

With hotel occupancy rates falling to the low 20s, some hotel operators have been making partial interest payments, but are unable to keep up with principal and interest payments on debt, said CWCapital’s president and chief operating officer, Jim Shevlin.

“We are relatively optimistic about industrial properties,” Shevlin said. “We aren’t seeing much distress come in for CMBS loans supported by industrial properties, and the shift to online retail will likely boost this sector’s fortunes.”

Multifamily loans are also likely to be less hard-hit, because of the necessity of housing and because rent growth and vacancy levels for rental housing were strong before the Covid-19 crisis hit, the report said.

But the report found that agency multifamily MBS loans, issued by the quasi-governmental agencies Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac), were performing far better than non-agency multifamily CMBS loans.

For multifamily loans where “Covid-19” or “forbearance” appeared in servicer comments, the majority (97.1%) of those issued by agencies were current, but that was the case for only about half (53.8%) of non-agency issuances, the report said, even though those loans, totaling about $2.2 billion, were roughly equally divided between agency and non-agency issuers, the report said.

Agency lenders such as Freddie Mac offering standardized forbearance programs could account for the difference, as well as the “greater mix, quality and unique circumstances sometimes associated with non-agency properties,” the report said. “As time progresses, the true difference in credit quality between agency and non-agency multifamily will be seen,” it added.

There were no new CMBS issuances planned for June, given the ongoing uncertainty of the Covid-19 crisis, the report said. Instead more loans were likely to move into special servicing, and the focus for servicers and borrowers would be processing the outstanding CMBS book and deciding on next steps such as forbearance or loan modification.