Commercial mortgage delinquencies rise
Problems in the hotel and lodging sectors are driving up the default rate for commercial mortgages.
In November, 5.7% of commercial mortgages were in arrears, compared to 5.4% in October, according to the Mortgage Bankers Association. The defaults can be traced to accommodation and retail loans that fell behind in April and May, which have now moved into defaults at a later stage.
“November saw small increases in new delinquent retail, accommodation and office loans, but at levels well below what was seen at the start of the pandemic,” said Jamie Woodwell, vice president. -chair of the MBA’s commercial real estate research, in a statement.
Accommodation, where 22.1% of loans were in arrears in November, had the most problems. In October, 21.0% of the sector’s loans were outstanding. In retail trade, 12.9% of loan balances were past due in November, up from 12.0% in October.
The industry has actually seen a decrease in delinquencies. In November, 2.5% of home loan balances were overdue, compared to 2.6% in October, according to MBA. The sector has been boosted by strong demand for e-commerce throughout the pandemic.
Delinquencies on office buildings rose from 2.0% in October to 2.4% in November. Multifamily, with 1.6% overdue balances in November, remained unchanged from October.
Hotels, unsurprisingly, have been the hardest hit by the pandemic, as travelers have stayed home. Although it has been estimated that it could take them a few years to return to post-pandemic numbers, their recovery is economic and likely dependent on the availability of vaccines. Once the vaccines are widespread, people should start traveling again. In fact, there may be pent-up travel demand.
Then there is the retail sector where brick-and-mortar establishments faced challenges competing with e-commerce before the pandemic hit. This sector has a more difficult climb as it is grappling with structural changes. Many retailers have declared bankruptcy amid the pandemic, with many restructuring and returning to the market with a smaller store footprint. Although the sector will get a boost when the economy recovers, it has yet to resolve its pre-pandemic issues of transitioning to an experiential destination.
Offices could also experience a post-pandemic transition as many workers have become accustomed to working from home. Businesses will have to decide if they want their employees to work from home, bring them back to the office, or run a variation in between.
The multifamily has also struggled as more people fall out of work and Congress shows little sign of offering more stimulus or support to renters. Many people are also moving out of urban areas amid the pandemic, which has put pressure on apartments in those areas.
However, these properties are unlikely to experience much distress, says Sam Isaacson, chairman of Walker & Dunlop Investment Partners in a previous interview. But even if there’s no real distress in the market, he thinks a lot of developers will want to pull out of deals because “their equity is wiped out.”
“You are sitting at 95% of the [capital] stack, and you’ll just move on and build the next transaction,” says Isaacson. “You’ll make it up on the next deal or 10 deals or whatever.”