The delinquency rate for loans held in commercial mortgage-backed securities (CMBS) shot up 21 basis points in August to a record high of 8.92%, according to a report just released by researcher Trepp LLC.
The multifamily sector was hit hard, as 30-day delinquencies rose 53 basis points to 14.53%, while hotel delinquencies jumped 51 basis points to 18.92%.
The new figures indicate that far from moderating as some analysts expected after rates eased for two months, the level of CMBS loan distress has deepened. And it may get worse before the sector improves.
“We do continue to anticipate that the delinquency rate will rise throughout the remainder of the year. We’ll probably see it peaking sometime in the middle of 2011,” says Paul Mancuso, vice president with Trepp. “From what we’re seeing, the number of loans that continue to enter special servicing continues to rise month over month over month.”
A nightly fight
Both multifamily and lodging loans face rental challenges that make stabilizing difficult as the nation tries to recover from the effects of recession, says Mancuso. “In the lodging sector, those property owners have to fight on a daily or nightly basis to fill rooms. In this environment with some of the economic turmoil, when they do manage to fill rooms, it’s usually at compromised or reduced rates, which have an impact on the bottom line.”
The multifamily sector faces other difficulties. Lease structures tend to be short-term, often six months to a year. And overbuilding has plagued the industry at a time when rising unemployment has reduced the number of prospective tenants. Many would-be tenants are doubling up or returning to parental homes to avoid monthly lease and utility expenses.
For these reasons, many apartment owners have felt compelled to offer concessions, such as several months’ free rent, to lure tenants to their properties. But the concessions and lower occupancies in some markets have caused many landlords to encounter difficulty in making their loan payments. This is particularly the case in secondary markets and among owners of B-Class and C-Class properties.
Some delinquency rates triple
And that difficulty in meeting mortgage obligations has translated to rising delinquency levels in the multifamily segment. The month-over-month increase in the delinquency rate demonstrates the ongoing distress, but the current levels seem even more dramatic on a year-over-year basis.
For instance, the 30-day multifamily delinquency rate for CMBS loans reached 14.53% in August. That rate is more than twice as high as the rate a year earlier, in August 2009, when it registered 6.8%. The 30-day delinquency rate in the hotel sector, meanwhile, has tripled, rising from 6.15% in August 2009 to 18.92% in August 2010.
Among all five property types, including industrial, lodging, multifamily, office and retail, the only one to experience a monthly decline in 30-day delinquencies was retail. The sector’s rate dropped from 6.9% in July to 6.76% in August. However, researchers aren’t cheering just yet. “Right now we’re just interpreting that as a one-month blip, and we’ll continue to monitor it for the next three or four months to see if in fact it was a blip and if the numbers do continue to rise,” says Mancuso.
The office CMBS loan delinquency rate rose slightly, from 6.35% in July to 6.57% in August, according to Trepp. The office delinquency rate has more than doubled in a year, however, from just 2.27% in August 2009.
“Office and retail are a little bit insulated in the near-term because their lease structure is a lot more long-term in nature. So they are what we generally consider laggards in the industry,” explains Mancuso.
Trophies in distress
As the level of distress has risen, so has the response by lenders and other stakeholders. “One good thing we see is that special servicers are increasing the volume and pace of loan modification,” says Mancuso.
Properties whose loans are being modified include trophy buildings offered for sale from 2005 to 2007, when underwriting standards were more lax, he notes. “If the building is a Class-A property, and it’s located in a prime geographical area, a lot of those loans are being modified. Unfortunately, what we’re not seeing is the Class-C and Class-D office properties in a suburban market, well outside the downtown core. Those loans are having a difficult time refinancing or even being modified.”
The two regions with the greatest amount of current distress are the Southeast, particularly Florida, and portions of Georgia, Louisiana and Mississipi, and the North Central tier, including swaths of Illinois, Michigan and Ohio, where factories have closed. Distressed secondary and tertiary markets include Tallahassee, Fla., Shreveport, La. and Jackson, Miss.
“We’re also seeing a lot of distress in the markets that were responsible for the boom in CMBS – Florida, Nevada, and Arizona. Those are also being hit hard,” says Mancuso.
Trepp’s separate list of properties with CMBS loans at least 60 days delinquent includes such high-profile structures as the Westin O’Hare in Chicago, with a current loan balance of $101 million, the Hyatt on Capital Hill in Columbus, Ohio with a balance of $31.4 million, and Tower Place 200 in Atlanta, with a balance of $50.5 million.
It is a list that no commercial real estate company wants to land on. When a loan turns 60 days delinquent, at least 90% of the time, the loan will have to be resolved in a distress scenario, reports Mancuso.
“Generally speaking, based on the past experience of our members, once a loan hits 60 days delinquent, there’s really no going back.”