The commercial mortgage market is healthier than expected
The collapse in commercial mortgages that made many troubled investors salivate at the start of the pandemic never materialized, as the government bailouts created unprecedented cooperation between lenders and borrowers. But certain types of properties remain vulnerable and, after the relaunch ends, could be ripe choices, said Kingsley Greenland, CEO of DebtX.
At the start of the closing, troubled debt investors were making arguments that favored the likelihood of a trade credit market collapse.
“Of course, a handful of new buyers and some back on the sidelines were looking for high returns above the market, but they were quickly disappointed,” Greenland wrote. “Investor returns have tightened rather than eased. The prices of distressed assets have soared in the face of the looming credit crunch.”
This is because the volume of non-performing loans, although higher than in recent years, especially among hotels and retail businesses, has remained close to historically low levels.
Since last June, the commercial and multi-family late payment rate for mortgages of all types of investors peaked at 6.4% in August before falling to 5% for March, reported the Mortgage Bankers Association earlier this month.
As a result, the “surprising lack” of non-performing loan sales by lenders seeking to wipe these mortgages off their books has created an imbalance between supply and demand.
“The stimulus packages have maintained the liquidity of many companies and the banks have found a supportive regulatory environment which has encouraged cooperation with borrowers,” Greenland said. “Routine credit extensions without adverse regulatory consequences – unheard of in previous financial crises – have created a safe haven for distressed loans.”
Despite the lack of sales of NPLs, the overall market has been quite active last year; DebtX’s volume was considerably higher than in the previous 12-month period, Greenland said.
“The sellers were looking to rebalance a loan portfolio according to changing market conditions, without getting rid of bad loans,” Greenland continued. “They were optimizing their balance sheets on a risk-adjusted basis to move their institutions forward.”
But there will still be a bit of non-performing commercial mortgage stress in the market for a bit longer.
“Time is probably running out for weakened office, home and health care loans,” Greenland said. “It will be interesting to see what happens after the stimulus payments sweep the system.”
Even with the recent improvement, the latest data from commercial mortgage-backed securities tracked by Fitch Ratings shows hotel defaults amounted to 16.72% in March, down 8 basis points from February. .
However, commercial properties saw a strong improvement, down more than a percentage point, to 9.01% in March from 10.08% in February. This is explained by a sharp drop in defaults in shopping centers, to 14.39% in March against 17.48% in February.