According to Trepp, the commercial mortgage-backed security (CMBS) delinquency rate in May logged its largest increase since data began being collected in 2009. Specifically, the CMBS delinquency rate for commercial property stood at 2.29% in April 2020 but jumped to 7.15% in May, the highest reading on record.
According to Trepp, "The numbers could head higher in June, considering that about 7.6% of loans by balance missed the May payment but remained less than 30 days delinquent. As more forbearances receive approval, some delinquent loans could revert to current status based on expectations of how loan statuses will be reported in servicer data going forward, if reported correctly."
By way of comparison, the delinquency rate in May of 2019 stood at 2.66%. When broken down by industry, the statistics become much more revealing:
- Industrial delinquency rose 46 basis points to 1.82%.
- Lodging delinquency rose 1,642 basis points to 19.13%.
- Multifamily delinquency rose 133 basis points to 3.25%.
- Office delinquency rose up 48 basis points to 2.40%.
- Retail delinquency rose 647 basis points to 10.14%.
As you can see, retail and lodging were hit the hardest in May, with other sectors staying relatively healthy despite the current economic situation. Interesting to see office delinquencies have not spiked yet, telling us that the worst has yet to come for the office sector as more and more workers and businesses move to remote work policies.
Trepp sees some silver lining in these numbers, noting that "Given that about 8% of loans had missed payments for the April remittance cycle, the fact that delinquencies went up less than 5% has to be viewed as a small win."
Opportunity for investors
As we anticipate an increase in delinquencies moving into the summer months, there are opportunities ahead for well-capitalized investors. Consider the hotel industry that is one of the hardest-hit sectors of our economy. Investors may be able to acquire hotel properties -- particularly in the boutique submarket -- that can be converted into long-term multifamily assets or find small retail or office properties that can be converted into a different asset class, such as self-storage or data warehousing.
Further, as pain is felt across selected asset classes such as retail, lodging, and soon, office, investors holding these assets may need to offload more productive properties such as multifamily or industrial to help generate liquidity.
Bottom line is that now is the time to pay attention to what's coming up for sale and to explore all creative ways to reposition poorly producing commercial real estate assets.