Commercial mortgage defaults could reach deep recession levels, credit rating agency says

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Stressed by the economic fallout from the coronavirus pandemic, securitized commercial real estate loans could reach levels of delinquency not seen since the Great Recession.

According to the rating agency Fitch Ratings, the CMBS loan payment defaults will increase between 8.25% and 8.75% by the end of the third quarter of the year, approaching the peak of 9.01% in July 2011. This projection comes against a background of previously constant declines defaults, which stood at 1.31% in March.

The sectors most vulnerable to the effects of COVID-19 are hospitality, retail and student housing, as well as properties with a single insolvent tenant.

Fitch waits for the highest delinquency the rates are occurring in hospitality and retail, which have already been hit particularly hard by store closures and the hiatus in tourism during the coronavirus crisis. Short-term defaults will reach 30% for hotels (against a previous high of 21.31%) and 20% for retail (against a previous peak of 7.67%).

As Forbes.com contributor Brad Thomas reported, shopping malls across the country are entering a tough time with major tenants struggling with liquidity. Fitch predicts that some retail tenants will stop paying their rent in the short term, adding further pressure to CMBS loans that had already underperformed before COVID-19.

Retail businesses in secondary and tertiary markets with weak tenants and limited access to liquidity face more severe financial adversity than the coronavirus-induced hardships of leading regional malls and properties with tenants in the region. essential industries such as supermarkets, banks and pharmacies.

Shopping malls and outlets, whose loans mature this year, are also at increased risk of delinquency due to the current scarcity of capital, Fitch said.

Multi-family properties that house students or hourly workers will also struggle to meet their loan obligations, as many campuses closed in early March and jobless claims have hit nearly 17 million in the past three weeks.

Loans of offices with a high percentage of shared workspaces are also likely to suffer. WeWork, a one-off co-work juggernaut, for example, is currently spinning in a whirlwind of social distancing rules that have forced companies to work remotely and internal conflicts to force backer SoftBank to honor a payment of $ 3. billion dollars now abandoned.

How government assistance takes into account

Fitch’s delinquency projections do not take abstention into account. Earlier in April, Fitch reported that more than 2,600 commercial real estate borrowers, with just over $ 49 billion in loans, have asked for debt relief, citing closed businesses and notices of non-payment of rent of tenants, during the first two weeks of the coronavirus epidemic in the us

Fitch says forbearance plans could delay or underestimate default rates because in the short term, borrowers can suspend payments without risking default.

Meanwhile, however, the Federal Reserve has expanded its recently reinstated term asset-backed securities lending facility program, which provides liquidity to securities markets, to AAA-rated tranches of outstanding CMBS loans as well as newly issued covered bonds.

Robert Broeksmit, President and CEO of the Mortgage Bankers Association, said in a press release: “ [helps] mortgage markets more broadly and helps ensure that lenders can continue to finance properties, especially in small and medium-sized markets across the country, where many small businesses employ millions of Americans. “

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