- The U.S. CMBS overall delinquency rate continued its ascent for a second consecutive month, increasing by 287 basis points (bps) month over month, to 9.04% in June 2020.
- Loans in "grace period" status fell to 3.97% in June from 7.15% in May and 7.62% in April.
- The delinquency rate for CMBS 2.0 transactions increased 282 bps to 8.16%, while CMBS 1.0 deals increased 576 bps to 40.37%.
- The delinquency rate increased for all major property types except industrial, which showed a 17 bps decline. Lodging and retail continued to rise by 481 bps and 789 bps, respectively, while multifamily (2 bps) and office (21 bps) showed slight increases.
Overall Delinquency Rate Rose To 9.04%; 55.8% Of Previously Grace Balance Goes Delinquent
The overall delinquency (DQ) rate for U.S. commercial mortgage-backed securities (CMBS) transactions increased by 287 bps month over month to 9.04% in June. As foreshadowed by the grace period rate last month, the DQ rate increased for a second consecutive month, to again, the highest number seen since we started tracking the comprehensive CMBS portfolio DQ in January 2017 (see chart 1). By dollar amount, total DQ increased $17.13 billion month over month and $41.74 billion year over year, to $53.8 billion. Since January 2017, the overall DQ rate has increased by 473 bps. The average year-over-year change in the DQ rate also rose for a second consecutive month. (see chart 2).
The looming concern highlighted over the last couple of months regarding the spiked levels of loans in their grace period, continued to contribute to the increase in the DQ rate for the month of June. Despite the grace period levels receding to 3.97% in June 2020, the risks of increases in the DQ rates still persists; however, the rise might not be as dramatic as we observed in previous months. Of the $23.65 billion of total grace loans balance in June, $15.30 billion represents the new transfers to grace this month. We also observed that more than half of the previous grace loans are now delinquent with a 55.8% grace-to-DQ conversion rate (i.e., the proportion of outstanding balance that was in grace in the previous month and went into delinquency this month) (see chart 4).
Special Servicing Rate Up By 182 bps; Watchlist Proportion Increases
Chart 5 illustrates the special servicing (SS) rate overlaid with the DQ and grace rates. The June 2020 SS rate is 7.42% -182 bps higher than the May 2020 number of 5.60%. The retail and lodging sectors experienced the highest month-over-month increases. The retail SS rate increased to 13.64% in June from 8.96% in May. Lodging also continues its steep hike, with an increase to 19.11% in June from 15.65% in May. As a result of the pandemic impact, forbearance relief requests will continue to remain elevated and may result in further transfers to the special servicer, yielding a continued rise for the SS transfer rate over the next several months.
Currently, per the CREFC investor reporting package update 8.1, loans that are in forbearance are tagged with a watchlist code "6A" to better identify those currently under forbearance due to the COVID-19 pandemic. Based on these reporting updates, the retail and lodging sectors also constitute the largest proportion of loans on the watchlist due to the pandemic (see chart 6). The $19.22 billion and $19.58 billion of retail and lodging loans representing 14.0% and 21.1% of the overall retail and lodging, respectively, are now part of the servicer watchlist due to the COVID-19 pandemic.
Newly Delinquent Loans Total $21.7 Billion In June
Month over month, the DQ rate increased 576 bps to 40.37% for CMBS 1.0 transactions and 282 bps to 8.16% for CMBS 2.0 transactions. To analyze the DQ rate by vintage, we looked at the rolling-12-month average in order to smooth out the sharp fluctuations. We observed that DQ rates are trending upward for all vintages in June (see chart 7). In addition, the delinquency rate also increased for all major property types, except industrial, which showed a 17 bps decline. Lodging and retail continue to show the largest increases at 480 bps and 789 bps, respectively, while multifamily (2 bps) and office(21 bps) saw marginal increases (see chart 8). Another noteworthy mention is that properties tracked as mixed-use and other also saw a substantial increase of 425 and 367 bps, respectively, compared to their May 2020 DQ number
The property type composition of delinquent loans has changed year over year: Lodging showed an increase (26.0% year over year), while office showed the largest decline (22.9%) (see charts 9 and 10). Retail stands as the largest property type for delinquency rate composition, at 43.8% in June 2020, compared with 44.0% in June 2019.
There were 753 newly delinquent loans (totaling $21.7 billion) in June, including 309 lodging loans ($7.7 billion), 320 retail loans ($11.0 billion), 27 office loans ($547.6 million), 20 multifamily loans ($312.8 million), and four industrial loans ($28 million).
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The authors would like to thank Bushra Dawawala for her research contributions to this report.
This report does not constitute a rating action.
|Primary Credit Analysts:||Ambika Garg, Chicago + 1 (312) 233 7034;|
|Tamara A Hoffman, New York (1) 212-438-3365;|
|Secondary Contact:||Deegant R Pandya, New York (1) 212-438-1289;|
|Research Contact:||James M Manzi, CFA, Washington D.C. (1) 434-529-2858;|
|Tom Schopflocher, New York (1) 212-438-6722;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.