Nearly one-quarter of loans backed by U.S. hotels in commercial mortgage-backed securities were at least 30 days delinquent for June, while the rate for all property types climbed close to an all-time high, Trepp LLC said.
The data firm said the CMBS delinquency rate reached 10.32% for June, up 317 basis points from the May rate but just short of the all-time high of 10.34% following the last global financial crisis, in July 2012.
Some 6.25% of loans were "seriously delinquent" for the month: either 60 or more days past due; in foreclosure; classified as REO; or with non-performing balloon loans. The figures represent a sharp escalation from the months before the pandemic, when the overall delinquency rate hovered below 3%, sinking to a recent-months' low of 2.04% in February.
The COVID-19 pandemic, and the travel restrictions and mandated closures that many local governments have instituted in response, damaged many tenants' ability to pay rent and throwing many commercial landlords into distress on their mortgage loans. The hotel and retail sectors have been hardest-hit, with delinquency rates reaching 24.30% and 18.07%, respectively, in June, Trepp said.
According to S&P Global Ratings, new CMBS issuance in 2020, of roughly $28 billion, was down 28% from the $39 billion that had been issued at the same point in 2019. Just over $2 billion in new conduit transactions were completed in June, compared to roughly $4 billion in May.
The percentage of loans in special servicing rose to 8.28% in June from 6.07% in May; more than 20% of loans were on servicer watchlists with signs of potential distress.
Trepp noted that 4.1% of loans by balance missed their scheduled June payments but remained less than 30 days delinquent — an indication that the delinquency total could rise further in July.
Still, the percentage of such loans, in or beyond grace periods but not delinquent, was down sharply from a peak of 8.1% in April. That decline suggests that delinquencies may have reached "terminal velocity," the firm said, adding: "If a borrower didn't need relief in April, May or June, there is a good chance the borrower won't be needing it."
The escalation of delinquencies was sharp in the worst-hit sectors, with the rate climbing by 517 basis points in lodging and 793 basis points in retail. In the industrial sector, though, delinquencies fell by 25 basis points to 1.57% in June. Industrial properties have fared relatively well in the pandemic in part because of their typically long lease durations and their ties to e-commerce, which has thrived while business at many brick-and-mortar stores suffered.
The future course of the pandemic and its effects on commercial real estate remain uncertain: While many U.S. states are moving toward easing restrictions instituted in the early days of the coronavirus crisis, some localities — including Arizona, Texas, California and New York City — have delayed or modified reopening plans as infection rates climbed in some parts of the country.
The federal government's future response to COVID-19 is also unresolved. In a June 30 letter, the president and CEO of the American Hotel and Lodging Association, an industry group, said only 20% of hotels have received "urgently needed" debt relief from CMBS lenders.
"Without action to shore up commercial debt, especially CMBS loans, the hotel industry will experience mass foreclosures and permanent job losses which will snowball into a larger commercial real estate crisis impacting other segments of the economy," the executive, Chip Rogers, wrote in a statement.
In remarks the same day, U.S. Treasury Secretary Steven Mnuchin said "one of the problems" of the CMBS market is an abundance of strict contractual obligations on borrowers. Mnuchin added that future federal coronavirus relief legislation should include additional funding enabling companies in hard-hit industries to rehire workers.