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Post-Pandemic, CMBS Purgatory is Still a Crowded Place
The onset of the economic downturn stemming from the COVID-19 pandemic led to billions of dollars in CMBS loans markets becoming delinquent. Whatever happened to all of that distressed securitized debt? A Trepp analysis shows that much of it is still out there.
“Three months after the U.S. implemented widespread lockdowns last March, CMBS delinquency rates surged to a post-Great Financial Crisis peak of 10.32% in June 2020,” said Catherine Liu, associate research manager at Trepp. “The surge reflected both the immense scale and speed that the distress played out in the commercial real estate industry during the pandemic-induced crisis.”
Predictably, the hardest-hit lodging and retail segments were the main drivers of the spike as delinquencies for the two property types surged to new all-time highs of 24.30% and 18.07%, respectively, in June of 2020. By comparison, the overall CMBS delinquency rate reached a peak of 10.34% in mid-2012 several years after the start of the last economic downturn.
As the Trepp report shows, for those distressed asset buyers worried they have “missed the boat,” very few assets that were distressed in June 2020 have been resolved away. “The list of distressed loans sitting in CMBS purgatory remains large and unresolved,” according to Trepp.
Last June, roughly $54.5 billion in private-label CMBS loans were 30 or more days delinquent on payment. From this total, about $38.5 billion or 70% consisted of loans in the “30-day” or “60-day” past due buckets. “Roughly $17 billion in retail loans and $16 billion in lodging loans were 30 or 60 days past due as of June 2020, which made up 86% of all loans in that category, though many had previously boasted strong financials and had never been delinquent prior to COVID,”the report states.
Overall, 45.2% of loans that were 30 or 60 days past due in June remained delinquent as of the most recent remittance data, 53.4% were “cured” or reverted to current status, and only 1.4% have paid off. From the $38.5 billion loan balance, a large portion of loans have moved into more severe categories of delinquency as 22.6% are now 90+ days past due, 10.5% are in the foreclosure process, 1.8% are REO and 2.7% are non-performing beyond maturity.
While some of these loans will eventually be cured, Trepp notes that CMBS payoff percentages and disposition volume has decreased measurably since the start of COVID. “Only about 1.17% of the lodging balance and 0.64% of the retail balance have since retired or resolved away at this point, indicating that there is still a long way to go when it comes to paying down these troubled assets.
