Overall CMBS Defaults Slow But Maturity Defaults Rise

Fitch Ratings had some good news in its U.S. CMBS 2022 Loan Default Study. With all the talk of higher interest rates, bank problems, and a challenging financing front, overall defaults slowed.

“The total annual and cumulative default rates for 2022 were 0.3% and 17.9%, respectively, edging lower from 0.4% and 18.0% in 2021,” the firm wrote, then adding how the news might be no better than the logical result of arithmetic, “due to a 22% reduction in total defaults being offset by a comparable decline in issuance from the prior year.” So, a linear relation between the number of defaults and issued loans, which makes sense.

Something that also makes sense is, given increased difficult in refinancing and many loans after 2010 obtained under low rates and high leverage, that the amount of maturity defaults has increased.

Maturity defaults rose to 0.23% in 2022 from 0.17% in 2021. In dollars, that translates into 37.9% of total defaults, or $1.6 billion, in 2021; in 2022, that rose to 69.8%, or $2.2 billion. That is even higher than in 2020, when it was $1.2 billion.

The term default rate moved the other direction, falling from 0.27% of loans in 2021 to 0.10% in 2022, which was well below 2019’s 0.21% pre-pandemic rate and well off the peak in 2020 of 3.12%.

“Fitch Ratings anticipates the overall declining default trend to reverse in 2023, with the annual and cumulative default rates expected to increase amid likely higher volumes of loan transfers to special servicing during their term as well as an increase in maturity defaults as sponsors encounter higher refinancing costs, weaker commercial real estate fundamentals and tightening credit in the wake of banking stresses and deteriorating macroeconomic conditions,” the firm wrote.

Office, with low occupancies and high vacancies in addition to significant portions of obsolescent stock, led all other sectors in defaults. The property class represented 49.4% of all defaults, or $1.58 billion, in 2022. In comparison, 2021 saw office properties as 17.6% of all defaults, or $725 million.

Hotel loan defaults fell sharply. Hotels went from 28.1% of total defaults in 2021 to 9.3% in 2022. Volume fell as well, from 51 loans, or $1.16 billion, in 2021 to 13 loans at $298 million in 2022.

Retail fell some, from 41.8% of total defaults or $1.7 billion in 2021 to 34.3% of all defaults, for $1.1 billion, in 2022. That was still the second largest percentage of total default of any property type last year.

Fitch says that office and retail loans will continue to drive higher percentages of overall defaults going forward.