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Stressed by the economic fallout of the coronavirus pandemic, securitized commercial real estate mortgages could reach delinquency levels not seen since the Great Recession.
According to credit rating agency Fitch Ratings, CMBS loan defaults will spike between 8.25% and 8.75% by the end of the year’s third quarter, coming close to the peak of 9.01% in July 2011. The projection comes on the backdrop of previously steady declines in delinquencies, which stood at 1.31% in March.
The sectors most vulnerable to the effects of COVID-19 are hospitality, retail, student housings as well as properties with a single, non-credit worthy tenant.
Fitch expects the highest default rates to occur in hospitality and retail, which have already been hit particularly hard as stores have shuttered and tourism has paused during the coronavirus crisis. Delinquencies in the near term will reach 30% for hotels (up from a previous high of 21.31%) and 20% for retail (up from a prior peak of 7.67%).
As fellow contributor Brad Thomas reported, malls across the country are entering a rough patch with major tenants experiencing liquidity troubles. Fitch anticipates that some retail tenants will cease paying rent in the short term, adding further pressure to CMBS loans that had already underperformed prior to COVID-19.
Retail properties in secondary and tertiary markets with weak tenants and limited access to liquidity are to confront financial adversity that is more severe compared to the coronavirus-induced hardships of top-tier regional malls and properties with tenants in essential industries such as supermarkets, banks and pharmacies.
Malls and outlets, whose loans mature this year, are also at a heightened risk of delinquency due to currently scarce capital, Fitch says.
Multifamily properties that house students or hourly-wage employees will also struggle to meet their loan obligations as many campuses closed in early March and unemployment claims rose to nearly 17 million in the last three weeks.
Office loans with a high percentage of shared work spaces are likely to suffer as well. WeWork, a one-time co-working behemoth, for example, is currently spinning in a whirlpool of social-distancing rules that have forced companies to work remotely and internal strife to compel financial backer SoftBank to honor a now abandoned $3 billion payment.
How government assistance factors in
Fitch’s delinquency projections do not account for forbearance. Earlier in April, Fitch reported that more than 2,600 commercial real estate borrowers, holding a little over $49 billion of loans, have sought debt relief, citing closed businesses and tenants’ rent nonpayment notices, during the first two weeks of the coronavirus outbreak in the U.S.
Fitch states that forbearance plans could delay or understate delinquency rates as in the short term borrowers can suspend payments without risking a default.
Meanwhile, however, the Federal Reserve extended its recently reinstated Term Asset-Backed Securities Loan Facility program, which provides liquidity to the securities markets, to triple-A rated tranches of outstanding CMBS loans as well as newly issued collateralized obligations.
Robert Broeksmit, Mortgage Bankers Association president and CEO, said in a press release, “this [helps] mortgage markets more broadly and helps ensure lenders can continue to finance properties — particularly in small and mid-sized markets across the country, where numerous small businesses employ millions of Americans.”