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SF Credit Brief: U.S. CMBS Delinquency Rate Drops To 7.53% In October, But The Proportion Of Seriously Delinquent Loans Continues To Grow

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Overall Delinquency Rate Decreased To 7.53%; 7.27% Of All Loans Are In Forbearance

The overall delinquency (DQ) rate for U.S. commercial mortgage-backed securities (CMBS) transactions decreased by 60 bps month over month to 7.53% in October 2020 (see chart 1). By dollar amount, total DQs decreased $3.32 billion month over month and increased $34.94 billion year over year, to $45.33 billion. Since January 2017, the overall DQ rate has increased by 322 bps. The average year-over-year change in the DQ rate peaked in June 2020, but has since slowly declined (see chart 2).

Chart 1

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Chart 2

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We have been tracking the increase of watch list (WL) loans due to the increasing number of loans in forbearance or currently requesting forbearance relief; the forbearance rate is 7.27% as of October 2020. Currently, per the CREFC investor reporting package update 8.1, loans that are currently requesting forbearance or are in forbearance are tagged with WL code "6A" to better identify those currently under forbearance due to the COVID-19 pandemic or requesting relief. We are also tracking loans that have reported receiving a forbearance modification, along with the loans that are on the WL due to disruptions in cash flows because of COVID-19-related shutdowns. Looking at loans that were considered in forbearance last month, by balance, 8.28% of those loans are no longer in forbearance, 2.33% of those are now delinquent, while the remainder (5.94%) have returned to current status and are no longer requesting forbearance at this time.

Based on these reporting updates, the retail and lodging sectors continue to comprise the largest proportion of loans in forbearance or currently requesting forbearance relief due to the pandemic. Lodging and retail loans account for 50.21% ($21.98 billion) and 34.88% ($15.27 billion), respectively, of all loans currently in or requesting forbearance (see chart 4).

Chart 3

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Chart 4

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A Growing Share of Loans Are Transitioning To Seriously Delinquent Status

Though the overall DQ rate is down, the share of delinquent loans that are delinquent 60-plus days (i.e., seriously delinquent) is 85.00%, as grace period levels sharply receded over the last couple of months. Even though a percentage of 30-day delinquent loans were resolved and made current in the prior month, a growing share have transitioned to becoming seriously delinquent. Furthermore, the loans that are 120-plus-days delinquent (reported in the CREFC investor reporting package with a status of loan code of "6") continued to increase sharply, rising to over $17 billion; this now accounts for almost 40% of all delinquent loans.

Chart 5 shows the DQ by status. Chart 6 shows a breakdown of the July to October 2020 DQs by status.

Chart 5

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Chart 6

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Special Servicing Rate Declined By 16 Bps

Chart 7 illustrates the special servicing (SS) rate overlaid with the DQ and grace rates. The October 2020 SS rate is 9.37%, which is 16 bps lower than the 9.53% in September 2020. The lodging sector SS rate experienced the largest month-over-month decrease, by 51 bps to 24.08% in October 2020 from 24.59% in September 2020. The retail sector SS rate decreased by 21 bps to 17.77% in October from 17.98% in September.

Month over month, the DQ rate increased by 274 bps to 45.69% for CMBS 1.0 transactions, and decreased by 63 bps to 6.69% for CMBS 2.0 transactions. In addition, the delinquency rates for two of the major property types, lodging and retail, decreased by 329 bps and 40 bps, respectively. Meanwhile, the delinquency rates for industrial , multifamily, and office increased by 37 bps, 13 bps, and 16 bps, respectively (see chart 8).

Chart 7

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Chart 8

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Newly Delinquent Loans Total $4.56 Billion In October

The grace period levels increased to 3.30% in October 2020. Though notably higher compared to the start of the year, the grace rate has declined considerably from its peak in April 2020 of 7.62%, the October 2020 in-grace loans balance is $19.88 billion; $11.80 billion are loans that are newly in grace status this month. We also observed that previously in-grace loans are now delinquent at a 14.56% grace-to-DQ conversion rate (i.e., the proportion of outstanding balance that were in grace in the previous month that went into delinquency this month), and that about 29.99% of the loans were removed from the grace status.

The property type composition of delinquent loans has changed year over year. Lodging increased its share by 27.98%, while office decreased 20.61%, which continues to be the sharpest decline (see charts 9 and 10). Lodging is the most significant property type in terms of delinquency rate composition, at 37.96% in October 2020, compared with 9.97% in October 2019.

Chart 9

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Chart 10

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There were 160 newly delinquent loans (totaling $4.56 billion) in October, including 70 lodging loans ($2.19 billion), 39 retail loans ($1.19 billion), 16 office loans ($576.08 million), 12 multifamily loans ($187.19 million), and four industrial loans ($90.87 million).

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic. 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 Analyst:Tamara A Hoffman, New York (1) 212-438-3365;
tamara.hoffman@spglobal.com
Secondary Contacts:Senay Dawit, New York + 1 (212) 438 0132;
senay.dawit@spglobal.com
Deegant R Pandya, New York (1) 212-438-1289;
deegant.pandya@spglobal.com
Research Contacts:James M Manzi, CFA, Washington D.C. (1) 202-383-2028;
james.manzi@spglobal.com
Tom Schopflocher, New York (1) 212-438-6722;
tom.schopflocher@spglobal.com

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