Mall and hotel loans explode commercial mortgage-backed securities

CMBS delinquency rates for commercial properties climbed to 18% and for hotel properties to 24%.

By Wolf Richter for WOLF STREET.

The commercial mortgage-backed securities (CMBS) default rate climbed 317 basis points to 10.3% in June, after climbing 481 basis points in May, which was the highest peak significant month-over-month in data going back to 2009, according to Trepp, which tracks securitized mortgages for institutional clients.

Another 4.1% of the underlying loans missed the June payment deadline. Because they are not yet 30 days past due – they are marked as “Grace” or “Beyond Grace” – they are not yet included in the overdue stack. A loan that is in the “grace” period or in the “beyond grace” period could revert to “outstanding” in July without a payment being made, if the borrower enters into a loan agreement. abstention with the loan manager. If the borrower fails to secure a forbearance agreement, the loan will be added to the stack of loans over 30 days past due:

Trepp suggested it might get a bit worse, but slower and not much worse. “So maybe we have reached terminal delinquency speed,” as the report says, where “most borrowers who felt the need for debt service relief requested it”.

In other words, borrowers who survived April, May and June without becoming delinquents have a good chance of weathering the storm, according to this theory.

But that theory will be challenged by the retail collapse that continues despite the reopening of malls – more on that in a moment.

Commercial mortgages have a lump sum payment at the end of the term, and when the loan matures, the ball must be paid off or refinanced. But when that becomes impossible, “maturity defects could still be a problem,” Trepp said. “If so, one would expect increases in the delinquency rate going forward to be lower than what we saw in May and June.”

The percentage of “severely overdue” loans jumped 408 basis points in June to 6.25%, an increase reflecting the record increase in May in 30-day defaults that became severely overdue in June. These seriously past due loans fall in these stages:

• Offender over 60 days: 3.22%
• Delinquency over 90 days: 0.29% – low rate shows how quickly the crisis has hit the commercial real estate market
• Non-performing lump sum payment: 1.31%
• Already in foreclosure: 0.33%
• REO (“real estate owned” by lenders who have already taken possession of it): 1.1%

By type of property: Trade and Housing loans are becoming scarce.

Industrial real estate loans, as for warehouses, are the best performing category with a delinquency rate of 1.57% in June. E-commerce has been a major beneficiary of the pandemic and lockdowns, as much of non-food brick and mortar retail sales, and even some grocery sales, have moved online. Retailers, such as Macy’s and Nordstrom, whose stores have been closed, have reported increased e-commerce sales. And the physical part of e-commerce, distribution centers, remains in high demand.

Office mortgage loans are still experiencing low delinquency rates, although they increased in June to 2.66%, against 2.4% in May and 1.92% in April.

Multi-family loans (apartment buildings) are experiencing moderately increasing delinquency rates, to 3.29% in June, against 2.11% in June last year.

Commercial real estate loans – this is the brick and mortar collapse and includes many loans guaranteed by shopping malls and factory outlets – are crushed: 18.07% were in arrears in June.

Even though many malls have reopened, many stores remain closed there, many large retailers have filed for bankruptcy and the industry as a whole, which has seen a large chunk of its sales shift to e-commerce. , is in permanent decline. This has been going on for years, but the pandemic has compressed several years ahead of continued collapse into six months now.

Hotel real estate loans are hardest hit, as much of the travel industry has shut down. The delinquency rate climbed to 24.3% in June, and the area remains buzzing, with many hotels still closed (Trepp’s delinquency rate):

Many hotels that are now closed will eventually reopen, and those that are now open will eventually see their occupancy rates rise from current fiasco levels. But the glory days, especially for business travel – the most lucrative segment for hotels – may well be over, and that will be a difficult task in the future.

But the brick and mortar retail business is in a different ball game. It is now estimated that between 20,000 and 25,000 stores will be permanently closed this year, after nearly 10,000 stores were closed permanently last year, with department stores and clothing and fashion stores topping the list. .

Many retailers have filed for bankruptcy this year. Some of them will try to restructure their debts in bankruptcy court and keep operating, but with fewer stores. They use the bankruptcy process to withdraw from leases or renegotiate more favorable lease terms in places where they wish to continue to operate a store.

Some retailers are being liquidated and will be closing all of their stores. This includes Pier 1. Many retailers that have not yet filed for bankruptcy have unilaterally declared that they will not pay rent while their stores are shutting down. This includes Gap. And then, without payment of rent, there is no rush to reopen stores, even in malls that have reopened.

Other retailers, such as Nordstrom, have told landlords they will reduce the amount of rent they pay. In Nordstrom’s case, he told the owners of his department stores and Rack stores that he would only pay half the occupancy costs. for the rest of the year, according to Retail Drive, which obtained a copy of the letter. Nordstrom had already announced the permanent closure of 16 stores, and these owners are out of luck.

Department stores serve as anchor points in shopping centers. With their demise, pedestrian traffic in the mall further decreases and forces other retailers to close their stores. And when retailers disappear or don’t pay rent, landlords end up falling behind in servicing the mortgage.

In addition, many retail businesses are so mired in closed stores and stores that have stopped paying rent – amid retail valuations that have fallen in recent years – that when the loan matures, the landlord struggles to refinance the property to pay off the ball. This would trigger the “maturity defects” mentioned above.

These mortgages are held by banks, insurance companies and other institutional investors, and they will be busy sorting out, foreclosing on properties and recording losses. And some of those mortgages have been sliced ​​and spread over many CMBSs, and those installments are now missing in large numbers.

The problem with retailers is structural. The pandemic reduced in a matter of months three years to come of a brick-and-mortar collapse, which the industry could have handled more adequately. Unlike other industries, traditional retailers – clothing stores, department stores, outlet stores, specialty stores, even shoe stores – will not return to levels already slashed before the pandemic. During the pandemic, another large chunk of their sales has definitely shifted to e-commerce, and there will be little relief for homeowners, such as mall REITs, and for CMBSs that contain these mortgages.

In the area of ​​apartment rents, the impact of the pandemic is already being felt. Read... Massive changes are underway, the rental market is reacting in near real time: rents are plunging in San Francisco and oil fields are falling in expensive cities. But long list of double-digit winners

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