CMBS Delinquencies Low, But Ailing Retailers Could Present Trouble
CMBS delinquencies were low at the end of Q2 compared to the same time last year, despite the ailing retail sector.
Delinquency levels in the market — defined as loans with past due payments of at least 60 days, foreclosures and REOs — will likely remain that way for the rest of 2018, though it is also possible that troubled retailers might unsettle the CMBS market later in the year.
The CMBS delinquency rate hit a post-recession low of 2.24% in April and at the end of Q2, the rate was down 90 basis points compared with a year ago, after climbing before that.
New problem loans have been outnumbered recently by liquidations and originations, Morningstar's CMBS Third Quarter Market Outlook said. As servicers wind down their pre-2010 portfolios throughout the rest of this year, that will also help keep the delinquency rate low.
Currently, delinquencies for deals issued between 2010 and 2018 represent only 0.3% of the CMBS universe, while delinquent pre-crisis loans account for 1.9% of it.
However, driven in part by continuing retail weakness, especially in shopping centers with exposure to troubled tenants, the volume of watchlist loans should continue its gradual upswing this summer, the report states.
A watchlist loan includes CMBS that are at a higher risk of default for a variety of reasons, such as building vacancy, upcoming lease expirations or heavy debt.
The wave of retail bankruptcies that began in 2017 could lead to higher retail vacancy rates over the next year, Morningstar said. Also, consolidation in the grocery and apparel sectors could result in further store closures, especially in Class-B and C assets.
Even so, Morningstar doesn't expect a wave of regional mall defaults in 2018, which was more characteristic of CMBS in 2017.
The market will likewise resist other possible CMBS headwinds, such as rising interest rates, the Federal Reserve's downsizing of its balance sheet, fewer maturities in need of refinancing and signs of overbuilding in some real estate sectors, according to the report.
The multifamily sector, in particular, could experience slower growth, especially in markets that have had strong increases in supply. On the other hand, properties in secondary markets with weaker supply growth will probably outperform.
New CMBS issuance will total $44.3B for the first half of the year, the report said, citing Trepp data, which represents a healthy increase over the first half of 2017, when issuance was about $34.4B.
Issuance for single-asset, single-borrower CMBS is also expected to remain strong in 2018, with the year-to-date total as of the end of Q2 2018 at a shade over $18B, compared to about $11.8B during the same period last year.