Special Servicing Rates Highlight Improving Conditions

A turbulent 2020 ended with a decline in the special servicing rate in December, the third straight month registering a modest decline.

Overall, the Trepp CMBS Special Servicing rate declined 35 basis points in December, coming in at 9.81%, compared to 10.16% in November.

The decline was driven by a reduction in the lodging CMBS rate, which saw a 149 basis points drop in December. In November, it led a 11 basis points increase. By comparison, the rate came in at 2.27% in March—the month before the pandemic began.

The retail special servicing rate also declined 27 basis points month over month to 17.20% in December after hitting its year-to-date peak in September. The office CMBS delinquency rate also decreased slightly to 2.71%. Multifamily rose one basis point to 2.90%, while industrial dropped four basis points to 1.22%.

For CMBS 2.0+, the special servicing rate declined 30 basis points to 8.97% in December, according to Trepp. The outstanding balance of loans in special servicing fell $1.5 billion to $47.48 billion in December.

The overall special servicing rates for legacy CMBS loans fell 80 basis points to 50.55% in December. The total outstanding balance dropped by $5.79 billion in November to $5.47 billion in December.

Sixty loans were sent into special servicing in December after 61 entered the month before. These loans hold an outstanding balance of $1.26 billion, according to Trepp. Forty-two percent of the new specially serviced loan balance came from retail CMBS loans. It was followed by lodging CMBS loans, which accounted for about 28%.

While lodging should come back, some retail might be reimagined. Bayer Executive Vice President of Operations Doug Schneider anticipates some of the distressed properties hitting the market, particularly retail assets, which may need a change in uses. 

“Just as a retailer uses bankruptcy to financially reposition themselves, so too can real estate be repositioned,” Schneider told GlobeSt.com in an earlier interview. “Special servicing is a vehicle that can lead to reimagining what commercial real estate can be in a positive way.“

The coronavirus pandemic has just accelerated the need to address retail’s issues. Before COVID, Schneider thinks retail landlords might have had three to five years to figure out how to reimagine their properties. But COVID changed things.

“it’s coming much faster now,” Schneider told GlobeSt.com. “We’re going to see a lot of change with retail, but it’s ultimately going to be positive. A crisis is a terrible thing to waste when you can bring about positive improvements that are beneficial for the industry and the local community.”