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CMBS delinquencies climb in May, with hotels and retail faring worst

More than a third of hotel loans and a quarter of retail loans in private-label U.S. commercial mortgage-backed securities are on servicer watchlists with signs of potential distress, as the COVID-19 pandemic saps property income streams.

With roughly 70% of the private-label universe reporting data for May, 7.6% of CMBS loans in the category were delinquent by 30 days or more, compared to 2.29% in April, according to data firm Trepp LLC. In the most troubled property sectors, 19.3% of hotel loans and 10.0% of retail loans were delinquent, up from 2.71% and 3.67%, respectively, in April.

"The property types that were expected to be first and hardest hit have been first and hardest hit," Trepp Senior Managing Director Manus Clancy said in an interview. Still, he added, "I was a little bit surprised how big and how fast hotels started missing payments."

Hotel occupancies, rates and revenues have plummeted since the coronavirus pandemic forced widespread travel and event cancellations. Retail real estate, challenged in recent years by the rise of online commerce, has faced heightened difficulties amid virus-related stay-at-home orders and tenant bankruptcies.

CMBS servicer watchlists reference a broad range of potential problems, ranging from the relatively benign — failed inspections for missing fire extinguishers — to the more worrisome, such as departures of major tenants or debt-service coverage ratios falling below specified benchmarks.

In recent weeks, a new watchlist designation for borrower difficulties related to COVID-19 has grown by "leaps and bounds," Clancy said. In all, 20.7% of private-label CMBS loans reported so far for May were on servicer watchlists, including 35.7% of lodging loans, 25.5% of retail, 19.3% of multifamily and 13.0% of office.

Nearly 7% of all private-label CMBS loans reported for May are in special servicing — a shift in the mechanics of debt collection that often but not always coincides with delinquency — including 17.4% of lodging loans and 10.6% of retail loans.

Meanwhile, market observers seeking to predict how many borrowers may eventually fall into delinquency have been eyeing metrics that were little used before, including the percentage of borrowers who have missed payments but are still within grace periods, or are not yet 30 days delinquent. Clancy noted that not all loans in those categories eventually drift into delinquency — some borrowers resolve their problems and stay current — but said the combined percentage of such loans is around 10%, well above historical norms.

"It's the difference between the steady state of 1% to 2% and what you're seeing now that is informing the market," he said.

Fitch Ratings predicted in April that CMBS delinquencies will peak between 8.25% and 8.75% by the end of the third quarter, nearing levels from the last financial crisis.

Bank of America CMBS analysts wrote in a May 17 note that, with consumers wary of physical stores and leisure and corporate travelers similarly reluctant to book new trips, the retail and lodging sectors will be likely to recover gradually.

As a result, "we think it is reasonable to assume that a large portion of troubled borrowers that missed their monthly payment obligations last month will continue to do so," with loans currently within their grace periods rolling over into 30-day delinquency, the analysts wrote.

If that process plays out, they added, the 30-day delinquency rate could surpass the rate during the 2007-2008 financial crisis, becoming the highest on record.