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CRE Loan Delinquencies Continue Steady Decline, But Winter Uncertainties Subdue The Celebration

Commercial real estate loan delinquencies have been steadily dropping this year, even late in the summer when a further wave of coronavirus pandemic infections and deaths hit the country. The shrinking number of borrowers behind on loan payments reflects improvements even in the hardest-hit property types, retail and hospitality, experts say.

But that doesn't necessarily mean a healthy outlook for delinquencies, those same experts say. There is still potential for delinquencies to rise as the retail industry faces a logistics-challenged holiday season and business travel hasn't recovered enough to boost the hospitality industry.


"The brick-and-mortar retail industry still faces headwinds, especially for assets like regional malls, so it’s unclear how long this delinquency trend will continue," Morningstar Credit Information and Analytics Assistant Vice President Sarah Helwig said. "Retail landlords and retailers alike will need to adapt to changing consumer preferences."

Before the pandemic, the U.S. commercial real estate mortgage delinquency rate across asset classes was 0.6%. That rate skyrocketed through the year as the pandemic disrupted the economy, peaking at 1.3% in the fourth quarter of 2020, Trepp reports, citing data from about $160B in real estate loans. Trepp counts loans over 30 days late as delinquent, but balloons that are past their maturity date yet still current on their interest are counted as current.

Since then, delinquency rates have come down, with modest improvements during the first half of this year. As of the second quarter, Trepp put the overall CRE delinquency rate at 1.1% while the noncurrent (more serious delinquencies) rate came in at 0.9%, both still above their pre-pandemic levels. Only 0.4% of loans were noncurrent before the pandemic.

Delinquency rates for retail and lodging — 4.9% and 11.9%, respectively — were up slightly in Q2 2021 after showing improvement in Q1.

"The uptick in Q2 is a reminder that the path to recovery may be protracted over a longer period," Trepp notes.

Other measurements of CRE mortgage delinquency show a similar pattern: overall improvement, even in the hardest-hit sectors, but still elevated compared to before the pandemic when the overall delinquency rate for loans held by banks, life companies and the government-sponsored enterprises were well below 1%.

The September 2021 Mortgage Bankers Association's CREF Loan Performance Survey, which reported on about $2 trillion worth of loans, found that 3.3% of outstanding CRE loan balances weren't current that month, down from 3.4% in August. MBA also counts loans that are more than 30 days past due, are in foreclosure or are real estate owned as delinquent. 

Some 8.2% of retail loan balances were delinquent in September, down from 8.5% a month earlier, while 14% of lodging loans were delinquent, up from 13.4% a month earlier, MBA reports.

CMBS loan delinquency rates were higher than those of other capital sources, MBA also reported, attributing the condition to a higher concentration of hotel and retail loans among securitized loans. As of September, 7.2% of CMBS loan balances weren't current, up from 6.9% in August and still well elevated compared with two years ago when the rate was about 2.3%.

Those who track distressed loans watch three pools: the number of new delinquencies, borrowers who had been making payments just now falling behind, and the number of continued delinquencies. The slowing number of new delinquencies is one positive sign, experts say.

"The stress that entered — and remains — in the market is largely concentrated in lodging and retail properties, but with fewer new loans becoming delinquent, and shrinking balances of overall delinquency as lenders and servicers work out the longer-term troubled loans," MBA Vice President of Commercial Real Estate Research Jamie Woodwell said in a statement.

"Retail bankruptcies have also fallen in 2021 in part because the major retailers that were on the brink of bankruptcy filed for it at the start of the pandemic," Helwig said.

In other words, the early shutdowns of the pandemic killed off a lot of wounded retailers, taking some malls with them and spiking retail-associated loan delinquencies. Since then, fewer retailers have been going bust.

In the first half of 2021, only five retail companies with assets over $100M filed for bankruptcy, according to Cornerstone Research, putting 2021 on track to see far fewer bankruptcies than in 2020, when 31 retailers of that size went belly up, and even fewer than the 13 bankruptcies in 2019.


There are other bright spots for beleaguered property types as well. Some delinquencies associated with both hotels and retail are working their way through to resolution. There has been an unprecedented number of forbearance agreements over the past 19 months — some mandated by the federal government such as for GSE-backed loans, and some voluntary by lenders that didn't want to foreclose on a large number of properties during the pandemic. 

Resolutions of delinquent CMBS loans totaled $1.6B in August and $1.7B in July, according to Fitch Ratings. Most of the August total were loans associated with hotels ($490M) and retail ($820M), including loans attached to six regional malls ($498M).

The largest resolution in August was the $167M Newport Centre loan, secured by a regional mall in Jersey City, New Jersey, the rating agency reported. That loan was modified to extend its maturity to May 2023 with an additional 12-month option.

"Borrowers continue to bring loans current from improved property cash flows or additional relief granted by servicers," Fitch said in a recent commentary. 

Malls nationwide have been experiencing a steady recovery in foot traffic since the start of 2021, reports. In the pre-delta variant days of July, visits to indoor malls peaked for the year so far, coming in at 1% above the same month in 2019, and outdoor mall visits were up 1.8%. cited pent-up demand, less travel this year and a generalized excitement around retail reopening as the drivers for that month. Malls, big-box stores and even department stores saw a boost that month. By September, however, visits to indoor malls were off 6.5% compared to the same month in 2019 and visits to outdoor malls were down 5.2%. 

There is a case for optimism regarding traffic to retail in the coming months, posits. The declines in August and September were smaller than those seen in May and June, meaning that retail is still in better shape relative to where it was at the beginning of summer, despite the onset of the delta variant and a slump in travel.

Still, the steps that some retailers had to take to get through the pandemic might come back to haunt them, even in more flush times.

"Despite the decline in the number of large bankruptcies in the first half of 2021, future increases in borrowing costs could be concerning for companies that borrowed heavily to weather the pandemic," Cornerstone Research principal J.B. Doyle said. “We'll see if increases in debt burden affects bankruptcy filings in the future."

As for the hospitality industry, an upward nudge in leisure travel spurred occupancies and revenue per available for a short while in the summer, but hotels are now facing the colder months of the year without as much business travel as in previous years as leisure travel tails off. In August, U.S. hotel occupancy came in at 63.2%, down 11.3 percentage points from the same month in 2019, STR reports. Revenue per available room stood at $86.88, down 8.1% compared with August 2019.

By the end of 2021, the hotel industry will have taken in $59B less in business travel revenue than in 2019, according to a report by the American Hotel & Lodging Association and Kalibri Labs. The industry lost $49B in business travel revenue in 2020.

“We’re on a downward slope for the end of the year,” AHLA CEO Chip Rogers told The Wall Street Journal.

Some hotel segments are doing better than others. Boutique hotels proved to be relatively resilient during the pandemic, as have extended-stay brands.

"We get multiple inquiries a week from some of the extended-stay brands, and they're selling massive multipack franchising deals," Reveille Hospitality CEO Marco Roca Sr. said. "Before the pandemic, they weren't franchising at all."

As for the other property types, delinquency rates are low — all below 1% as of Q2, according to Trepp. But they too are a bit higher in most cases, with office delinquency up to 0.9% from its pre-pandemic 0.1% rate and multifamily up to 0.6% from 0.2% before the pandemic. Only the darling of investors and developers — industrial, driven by online sales — has a current delinquency rate of 0.1%, the same as it was before the crisis.

One thing that current delinquency rates aren't is higher than they were during the financial panic of the late 2000s or the recession of the early 1990s. In the first quarter of 2010, total delinquencies for all property types peaked at 8.92%, according to the Federal Reserve Bank of St. Louis. During the first quarter of 1991, the total was 12.09%.