Delinquency rates for US-based commercial mortgage-based securities (CMBS) jumped to a record high in June, according to Trepp LLC, as the COVID-19 crisis continues to take a toll on the commercial real estate markets.
According to the commercial mortgage research data firm, US-based CMBS delinquency rates jumped to a high of 10.32% in June, up over 3% since from May. This is just .02% away from their all-time high of 10.34% set in July 2012, in the aftermath of the 2008-2009 Global Financial Crisis (“2008-2009 GFC”).
In June, 4.07% of CMBS loans were 30-days delinquent, while approximately 6.25% of CMBS loans were considered “seriously delinquent”, either classified as: i) delinquent for 60-days or more, ii) in foreclosure, or iii) listed as real estate owned (REO) by the bank, or iv) non-performing loans. The latest June numbers indicate a sharp rise in delinquency within the industry since the onset of the COVID-19 crisis, when the overall CMBS delinquency rate was just under 3%.
The ongoing COVID-19 health crisis, and subsequent mandated government closures and lockdowns, have had a devastating impact on the industry as many commercial tenants are having a very difficult time servicing their rental obligations. As a result, many landlords are being forced into distress on their commercial mortgage loans, and in turn, it is having ripple effects through both the commercial real estate industry and assets not seen since the 2008-2009 GFC.
When diving into the sub-classes of the CMBS space, it is here we can get a real glimpse of of the (current) winners and losers. In June, lodging and retail CMBS have been hit the hardest, with delinquency rates for these two classes rising to 24.30% and 18.07% respectively, up from 19.13% and 10.14% in the month prior.
These two sectors continue to be hit hard, as travel restrictions, a global pandemic, and a subsequent plunge in travel volume has destroyed any and all demand for the lodging industry. Simultaneously, the COVID-19 pandemic and subsequent lockdown measures have accelerated the decline of the traditional brick-and-mortar industry, as consumers move online to fulfill their consumption needs.
In contrast, the industrial sector saw delinquencies fall by 0.25% to 1.57% in June, while the multi-family residential sector only rose 0.04% during the same time, providing some stability to these areas. Industrial properties continue to fare well relative to its commercial real estate peers amidst the COVID-19 crisis, primarily due to their ties to e-commerce operations and logistics functions for essential goods and services, as well as the long lease durations that their tenants sign. Further the multi-family residential sector, though seeing a slight uptick in delinquency rates in June, continues to remain stable, as many families continue to tap into rent relief programs to ensure that they have a roof over their heads.
The COVID-19 pandemic and its future effects on CMBS remain uncertain. Though many US states have eased restrictions recently, many are starting to have second thoughts as the US is experiencing a sudden spike in confirmed COVID-19 cases throughout the country, especially in the southern states. So much so, that southern states such as Arizona, California, Florida, and Texas, are contemplating whether to roll back recent re-opening plans, as infection rates skyrocket throughout these areas.
Unfortunately for an CMBS industry that is already undergoing much hardship, the possible rollback of such re-opening plans within the US will add further stresses onto this asset class. If the rollback of recent re-opening plans comes to fruition, coupled with the ongoing COVID-19 pandemic, we believe the CMBS markets could see numerous foreclosures and permanent job losses, which in turn could ripple out into a larger commercial real estate crisis impacting other areas of the US economy.
In our view, given this trajectory, we highly caution investors who are interested in the CMBS space to be highly selective of where they decide to place their money.
For those who are interested in both CMBS, as well as the commercial real estate space in general, we recommend for them to focus on areas that have a little more “tenant resiliency”, specifically industrial (logistics and data centers), multi-family residential, and office spaces.
In contrast, we would recommend for investors to avoid the lodging and brick-and-mortar retail spaces for the time being, as they have been hit the hardest due to the pandemic. we see this area of the commercial real estate space taking a longer amount of time to bounce back, as the psychological effects of COVID-19 on consumers will alter their behavioural and consumption patterns for years to come.
Cracks in the Foundation? US CMBS Delinquencies Rise To An All-Time High in June
The US CMBS market continues to face increased uncertainty, as commercial real estate delinquency rates continue to climb.
Delinquency rates for US-based commercial mortgage-based securities (CMBS) jumped to a record high in June, according to Trepp LLC, as the COVID-19 crisis continues to take a toll on the commercial real estate markets.
According to the commercial mortgage research data firm, US-based CMBS delinquency rates jumped to a high of 10.32% in June, up over 3% since from May. This is just .02% away from their all-time high of 10.34% set in July 2012, in the aftermath of the 2008-2009 Global Financial Crisis (“2008-2009 GFC”).
In June, 4.07% of CMBS loans were 30-days delinquent, while approximately 6.25% of CMBS loans were considered “seriously delinquent”, either classified as: i) delinquent for 60-days or more, ii) in foreclosure, or iii) listed as real estate owned (REO) by the bank, or iv) non-performing loans. The latest June numbers indicate a sharp rise in delinquency within the industry since the onset of the COVID-19 crisis, when the overall CMBS delinquency rate was just under 3%.
The ongoing COVID-19 health crisis, and subsequent mandated government closures and lockdowns, have had a devastating impact on the industry as many commercial tenants are having a very difficult time servicing their rental obligations. As a result, many landlords are being forced into distress on their commercial mortgage loans, and in turn, it is having ripple effects through both the commercial real estate industry and assets not seen since the 2008-2009 GFC.
When diving into the sub-classes of the CMBS space, it is here we can get a real glimpse of of the (current) winners and losers. In June, lodging and retail CMBS have been hit the hardest, with delinquency rates for these two classes rising to 24.30% and 18.07% respectively, up from 19.13% and 10.14% in the month prior.
These two sectors continue to be hit hard, as travel restrictions, a global pandemic, and a subsequent plunge in travel volume has destroyed any and all demand for the lodging industry. Simultaneously, the COVID-19 pandemic and subsequent lockdown measures have accelerated the decline of the traditional brick-and-mortar industry, as consumers move online to fulfill their consumption needs.
In contrast, the industrial sector saw delinquencies fall by 0.25% to 1.57% in June, while the multi-family residential sector only rose 0.04% during the same time, providing some stability to these areas. Industrial properties continue to fare well relative to its commercial real estate peers amidst the COVID-19 crisis, primarily due to their ties to e-commerce operations and logistics functions for essential goods and services, as well as the long lease durations that their tenants sign. Further the multi-family residential sector, though seeing a slight uptick in delinquency rates in June, continues to remain stable, as many families continue to tap into rent relief programs to ensure that they have a roof over their heads.
The COVID-19 pandemic and its future effects on CMBS remain uncertain. Though many US states have eased restrictions recently, many are starting to have second thoughts as the US is experiencing a sudden spike in confirmed COVID-19 cases throughout the country, especially in the southern states. So much so, that southern states such as Arizona, California, Florida, and Texas, are contemplating whether to roll back recent re-opening plans, as infection rates skyrocket throughout these areas.
Unfortunately for an CMBS industry that is already undergoing much hardship, the possible rollback of such re-opening plans within the US will add further stresses onto this asset class. If the rollback of recent re-opening plans comes to fruition, coupled with the ongoing COVID-19 pandemic, we believe the CMBS markets could see numerous foreclosures and permanent job losses, which in turn could ripple out into a larger commercial real estate crisis impacting other areas of the US economy.
In our view, given this trajectory, we highly caution investors who are interested in the CMBS space to be highly selective of where they decide to place their money.
For those who are interested in both CMBS, as well as the commercial real estate space in general, we recommend for them to focus on areas that have a little more “tenant resiliency”, specifically industrial (logistics and data centers), multi-family residential, and office spaces.
In contrast, we would recommend for investors to avoid the lodging and brick-and-mortar retail spaces for the time being, as they have been hit the hardest due to the pandemic. we see this area of the commercial real estate space taking a longer amount of time to bounce back, as the psychological effects of COVID-19 on consumers will alter their behavioural and consumption patterns for years to come.
© 2020 Economics Global Inc.
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