CMBS Bankruptcies Are an Aspect of Distress to Watch

According to a new Trepp analysis, there are indications in the CMBS space that trouble is brewing.

“A series of bankruptcies have impacted the commercial real estate (CRE) market significantly in recent months,” the firm wrote. “Inflation, supply chain issues, and shifting business models have negatively affected cash flow to properties, many of which are securitized in the CMBS market.”

It’s happening in two ways. One is when tenants buckle. The other is when the borrowers do. The latter is when things get nerve-wracking.

For months, many in commercial real estate have wondered when property distress would start to hit hard. Government support for hard times is gone. Inflation, while cooling, is still a force and that’s convinced the Federal Reserve to keep hiking the benchmark federal funds rate that affects short-term borrowing. Like for bridge types of funding.

There have been signs of the effects on CRE. One of the biggest New York City office building owners has said it will stop debt payments on some older buildings and hand them over to the lenders. The firm decided that some of its properties were no longer economically viable as potential tenants moved up to new Class-A buildings.

Trepp, instead, is looking at disruptions evolving from companies that can no longer keep trouble at bay and so are filing for bankruptcy. In some cases, the bankruptcies are in tenant companies. Regal Cinemas’ parent Cineworld, as Insider reported, and Party City have already filed. There are rumors that Bed Bath & Beyond will do as well soon.

Tenant bankruptcies are bad but rarely have they resulted in an entire building. The intersections between properties and tenants are far from complete and exact. There are 10 loans in CMBS, worth $716.6 million, that might feel the effect of Regal Cinemas closing. For Party City, there are 87 loans, for $2.2 billion, that could feel an effect.

However, there are some bankruptcies in which the entity that has taken out the loan is in trouble, with potential results that Trepp calls “much scarier.”

“Loan bankruptcies differ from the corporate bankruptcies discussed above, and have much more serious implications for CMBS loans,” Trepp wrote. “While corporate bankruptcies are certainly a negative for loan performance, especially if the tenant rejects the lease and the space isn’t backfilled quickly or the contractual lease rent is reduced in a Chapter 11 reorganization, the impact might be minimal if a new tenant backfills the bankrupt tenant’s space quickly.”

Trepp didn’t mention particular companies, only that the common pattern is 1 to 10 bankruptcies a month, usually in retail or lodging.