The default rate triples in the US commercial mortgage market

The percentage of commercial real estate loans defaulted by borrowers in the United States more than tripled last month, a sign of a deepening crisis in the $1.3 billion mortgage-backed bond market.

The delinquency rate on loans underlying commercial mortgage-backed securities rose from 2.3% in April to 7.4% in May, according to data service Trepp. Borrowers are considered delinquent when they do not make a payment within 30 days.

Another 8.6 percent of mortgages were within that 30-day grace period after missing a payment.

The sharp rise in delinquencies is a sign of growing stress in commercial mortgages, where borrowers have been squeezed by lockdowns imposed to limit the spread of the coronavirus. Travel bans and social distancing have eaten into hotel and retail revenues; corporate bankruptcies caused borrowers to default on office leases; while the pressure on consumers has resulted in widespread demands to defer apartment rent payments.

“Everyone is holding their breath to see what’s going to happen,” said Gunter Seeger, portfolio manager at PineBridge Investments.

Investors’ attention is now focused on remission reports for June, when loans outstanding since April become 60 days past due and could lead to more serious consequences. Loans could be renegotiated, resulting in losses for CMBS investors, or properties seized and sold.

“If the economy opens up and borrowers make their payments, investors will breathe a sigh of relief,” Seeger said. “What will be disturbing is if they miss a third payment in a row.”

The largest increase in unpaid mortgages was seen in the “accommodation” category, which covers hotels and commercial properties such as shopping malls.

More than 19% of home loans made on the CMBS market became delinquent in May, according to Trepp, up from 2.7% in April. In addition, 15.6% of loans were past due, but less than 30 days past due.

In the retail category, the equivalent figures were 3.7% in April and 10.3% in May. Another 13.4% of loans are now in grace period.

“Retail and hotels remain at the forefront of focus,” said Manus Clancy, head of research at Trepp. “We saw delinquencies really increase in May and we expect more delinquencies in June.”

Market prices reflect a rapid deterioration in credit quality as the coronavirus takes hold. A triple-B-rated tranche of a 2018 CMBS deal largely initiated by Deutsche Bank, which carries 19% exposure to accommodations, was trading at over 94 cents to the dollar in early March. It has since fallen to 56 cents.

Another Citigroup deal, issued in 2015 with heavy exposure to commercial properties, also struggled. The triple B-rated tranche fell to 55 cents on the dollar, from more than 98 cents in early March.

“It will take some time before we see this trend of rising delinquencies reversed,” said Jennifer Ripper, head of CMBS at Penn Mutual Asset Management in Horsham, Pennsylvania.

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