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Here's What Won And Lost In Last Year's CMBS Market

Last year was a difficult one for the commercial mortgage-backed securities market, but it wasn't as bad as it could have been, experts now say. The coronavirus pandemic split CMBS according to property type, with hotels and retail taking the brunt of the crisis and everything else holding steady.

DBRS Morningstar now predicts that overall pandemic-related CRE valuation losses will be below that of the 2008-2009 downturn, even though properties backing loans that were sent to special servicing since March have suffered an average value decline of 24% since their origination, driven by losses in the hotel and retail sectors.

DBRS Morningstar analyzed 284 CMBS-bundled loans totaling $9.79B that ended up with a special servicer since March 1. Only about 17% of those loans had an LTV of 100% or higher, pointing to a value deficiency of about 3.8% of the total principal balance. During the last recession, by contrast, there was a 9.5% loss rate on CMBS loans, the company said.


"Many of those loans have been salvaged by forbearance or modification," DBRS Morningstar Vice President, Head of Research–North American CMBS Steve Jellinek said. "Is this kicking the can down the road? Obviously, risks remained after the modifications were approved, but we hope that a rebounding economy will help the loans that are in forbearance."

There is no doubt about why some CMBS in 2020 did badly since the impact on hotels and retail properties has been clear. But why hasn't CMBS taken an even harder hit, especially in the office and multifamily sectors, considering the state of the economy? Expert opinion on that varies.

"The pandemic has been more hurtful to smaller businesses than larger corporations, and so has hurt smaller office properties more than large downtown or suburban office buildings, where the large corporations tend to be," Reonomy Market Analyst Omar Eltorai said. "I think that there are concerns around office and office performance, but they're very much concerns looking past the pandemic."

Many office CMBS loans tend to be associated with trophy properties, which haven't suffered as much as non-trophy properties. That bifurcation is likely to linger in 2021 as long as the economy is suffering, experts say, but even a robust post-pandemic recovery isn't going to put things back the way they were for CMBS

"Will there still be demand for as much office space, now that so many businesses have been forced to give remote work a try?" Eltorai said. "We don't know yet what the impact of that on office demand will be, but it could be significant."


After a peak in September, the overall CMBS special servicing rate began to decline modestly toward the end of 2020, according to Trepp, though the rates for various property types continue to vary widely. In November, the Trepp CMBS Special Servicing Rate was 10.16%, down from 10.28% in October. In November 2019, the overall rate came in at 3%, and in May 2020, the rate was 6.08%.

The averages mask the severe beating that lodging- and retail-associated CMBS took in 2020, as industries suffered in the face of the pandemic. In November 2019, the CMBS special servicing rate for lodging was 2.07%. A year later, it stood at 25.56%, roughly the same as the month before, when the rate was 25.45%, Trepp reported.

"We saw a lot more disruption in the hotel and retail debt space because the pandemic didn't slow business down, as it did for some sectors of the economy," Eltorai said. "It stopped business for a lot of those properties. They suddenly went from cash flowing to no cash flow." 

The expansion of hotel-related CMBS into special servicing mirrored worsening U.S. hotel industry fundamentals in 2020. Hotel occupancy dropped 34.5 percentage points over the year from November 2019 to November 2020, to come in at 40.3%, according to STR, and revenue per available room (RevPAR) came in at $36.67 in November 2020, down 52.6% compared with a year earlier.

In November, about 7 in 10 hoteliers (71%) surveyed by the American Hotel & Lodging Association said they would close in another six months without further federal assistance. Some relief for the industry was included in the stimulus bill passed in late December, especially in the form of re-funding the Paycheck Protection Program, but it isn't clear yet whether that will save many hotels.

"This short-term relief package is a vital step toward helping the hotel industry survive this crisis," AHLA President Chip Rogers said in a statement, though he stressed that more help will be needed. "The measure provides temporary relief over the next few months and will help thousands of hotels stay open and retain employees."

There was a modest rebound in the hotel sector late in the summer and during the year-end holidays, as more people than expected traveled despite the pandemic, Jellinek said. An end to the pandemic by this summer would spur an even deeper recovery for the hospitality sector.

In the early spring of 2020, sometimes fewer than 100,000 people passed through Transportation Security Administration checkpoints at U.S. airports each day, though in May the numbers tended to be between 100,000 and 300,000 people per day. A year earlier, more than 2 million passed through TSA checkpoints almost every day in the spring.

By the summer of 2020, the volume of air travelers had increased to more than 500,000 per day most of the time, and in October reached 1 million again one day, as it did on some of the days before Christmas. Even so, air travel was about half the volume that it was in late 2019.

Retail probably won't be so lucky, Jellinek added, with weakness in retail likely to persist because the sector was fundamentally weaker to begin with, and because consumer shopping habits very likely have changed permanently toward more online shopping.  

The special servicing rate for retail was already high in late 2019 compared with other property types, because retailers were already suffering from anemic sales and store closures. In November 2019, the special servicing rate for retail properties stood at 5.36%, Trepp reported. A year later, that already-high number had swelled to 17.47%.

"We project that the retail vacancy rate will have a tough time getting below 10%," Jellinek said. 

While overall retail sales grew 4.1% in November 2020 compared with a year ago, much of it driven by online sales, a number of retail sectors were crushed by the pandemic. Compared with a year earlier, sales at clothing stores were down 16.1% in November, while sales at electronics stores dropped 8.3%. Sales at department stores were off 19% and restaurants lost 17.2% of their sales.

The other three CMBS-associated property types that Trepp tracks, office, industrial and multifamily, have endured the pandemic relatively intact.

In the case of industrial loans, the special servicing rate is lower than it was a year ago, due to heightened demand for warehouse and distribution properties as more goods are ordered online. In November 2019, the industrial special servicing rate came in at 2.4%. A year later, the rate was 1.26%. Multifamily rose modestly from 2.5% in November 2019 to 2.89% a year later, while office likely rose from 2.71% to 2.82% year-over-year. 

Even within individual property types, however, some kinds of loans are doing better than others, Trepp LLC CEO Annemarie DiCola told LightBox’s principal analyst, Dianne Crocker, during a virtual fireside chat during the Mortgage Bankers Association of New York Annual Real Estate Lending Summit in the fall.

"Trepp’s data shows that certain types of retail continue to do well, including stand-alone drugstores and grocery-anchored shopping centers," she said. "Suburban office is also seeing an uptick as companies look to downsize CBD space in favor of suburban areas." 

Last year was also characterized by flight from CMBS as an investment vehicle. During the summer of 2020, for example, Blackstone Group decided to close the CMBS-specializing Blackstone Real Estate Income Master Fund.

The fund, previously a strong performer providing a 5.52% average return per year for the five years before 2020, suffered an asset value drop from about $773M at the end of 2019 to $553M in May 2020. Also during the summer, Blackstone quit negotiations with the special servicer of a $273.7M CMBS loan associated with four hotels.

As hotel- and retail-associated CMBS loans went to special servicing, new originations shifted away from those property types as well.

Industrial exposure more than doubled to 12% in Q3, up from 5% in Q2, representing a record amount, according to Standard & Poor's Global. Office exposure dropped slightly in Q3 to 39%, but it remains about 10 percentage points higher than in 2019. Multifamily exposure dropped six percentage points quarter-over-quarter to 16% in Q3 2020.

The radical shifts were in retail and hospitality: retail exposure rose to 9% in the third quarter, up a bit from 8% in the second quarter, but the figure was above 20% in 2019 and Q1 2020. Lodging ended the third quarter at 8% exposure, up from 2% in the second quarter, but below the recent averages in the low-to-mid teens. 

These shifts may linger somewhat, but Jellinek doesn't anticipate lasting damage to CMBS as a financing vehicle.

"We're actually pretty optimistic for 2021, projecting a 10 to 15% increase in volumes for the year compared to 2020," he said. "There will be a recovery."