Key Takeaways
The U.S. CMBS overall delinquency rate decreased by 51 basis points (bps) month over month, to 8.53% in July 2020.
Loans in grace period status dropped to 2.73% in July from 3.97% in June and 7.15% in May.
Even though 25% of 30-day delinquent loans were resolved, a growing share (60%) of those that were 30-day delinquent last month have transitioned to becoming seriously delinquent in July.
The delinquency rate for CMBS 2.0 transactions decreased by 50 bps to 7.66%, while CMBS 1.0 deals increased 135 bps to 41.72%.
Overall Delinquency Rate Drops To 8.53%; 25.78% Of Previously Grace Balance Goes Delinquent
The overall delinquency (DQ) rate for U.S. commercial mortgage-backed securities (CMBS) transactions decreased by 50 bps month over month, to 8.53% in July. Despite the decline, the DQ rate continues to be higher than what we have seen since we started tracking the comprehensive CMBS portfolio DQ in January 2017. By dollar amount, total DQ decreased $3.06 billion month over month and increased $39.52 billion year over year, to $50.77 billion. Since January 2017, the overall DQ rate has increased by 422 bps. The average year-over-year change in the DQ rate also rose for a third consecutive month (see chart 2).
Chart 1
Chart 2
The looming concern highlighted over the past couple of months regarding the spiked levels of loans in their grace period continued to contribute to the increase in the DQ rate for the month of July. The grace period levels receded to 2.73% in July 2020 (see chart 3). Though still fairly high compared to the start of the year, the declining rate potentially indicates a flattening or declining of the DQ rate in the coming months. Of the $16.22 billion balance of total grace loans in July, $8.89 billion represents the new transfers to grace this month. We also observed that previous grace loans are now delinquent, with a 25.8% grace-to-DQ conversion rate (i.e., the proportion of outstanding balance that was in grace in the previous month and went into delinquency this month), and about 43% of the loans were removed from the grace status (see chart 4).
Chart 3
Chart 4
Majority Of Loans Are 60+ Days Delinquent
While grace period levels have sharply receded since the prior month, the overall share of loans that are delinquent 60+ days (i.e., seriously delinquent) continues to grow as percentage of all loans in distress. Even though 25% of 30-day delinquent loans were resolved and made current in the prior month, a growing share (60%) of those that were 30-day delinquent last month have transitioned to becoming seriously delinquent in July. (See charts 5 and 6.)
Chart 5
Chart 6
Special Servicing Rate Up By 126 bps; Watchlist Proportion Decreases
Chart 7 illustrates the special servicing (SS) rate overlaid with the DQ and grace rates. The July 2020 SS rate is 8.7%--126 bps higher than the June 2020 number of 7.44%. The retail and lodging sectors experienced the highest month-over-month increases. The retail SS rate increased to 15.58% in July from 13.64% in June. Lodging also continued its steep hike, with an increase to 22.90% in July from 19.11% in June. As a result of the pandemic impact, forbearance relief requests will continue to remain elevated and may result in further transfers to the special servicer, yielding a continued rise for the SS transfer rate over the next several months.
Currently, per the CREFC investor reporting package update 8.1, loans that are in forbearance are tagged with a watchlist code "6A" to better identify those currently under forbearance due to the COVID-19 pandemic. Based on these reporting updates, the retail and lodging sectors also constitute the largest proportion of loans on the watchlist due to the pandemic (see chart 8). The $20.2 billion and $22.12 billion of retail and lodging loans (representing 14.8% and 23.7% of overall retail and lodging, respectively) are now part of the servicer watchlist due to the COVID-19 pandemic regardless of DQ status.
Chart 7
Chart 8
Newly Delinquent Loans Total $6.4 Billion In July
Month over month, the DQ rate increased 135 bps to 41.72% for CMBS 1.0 transactions, while it decreased 51 bps to 7.66% for CMBS 2.0 transactions. To analyze the DQ rate by vintage, we looked at the rolling-12-month average in order to smooth out the sharp fluctuations. We observed that DQ rates are trending upward for all vintages in July (see chart 9). In addition, the delinquency rate decreased for all major property types. retail and lodging showed the largest drops, by 175 bps and by 30 bps, respectively, followed by office (12 bps), industrial (7 bps), and multifamily (3 bps) (see chart 10).
Chart 9
Chart 10
Year over year, the property type composition of delinquent loans has changed: Lodging showed an increase (29.2% year over year), while office showed the largest decline (21.7%) (see charts 11 and 12). Retail stands as the largest property type for delinquency rate composition, at 41.6% in July 2020, compared with 45.9% in July 2019.
Chart 11
Chart 12
There were 290 newly delinquent loans (totaling $6.4 billion) in July, including 139 lodging loans ($2.92 billion), 96 retail loans ($2.41 billion), 11 office loans ($272.03 million), 18 multifamily loans ($235.13 million), and three industrial loans ($11.4 million).
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The authors would like to thank Bushra Dawawala for her research contributions to this report.
This report does not constitute a rating action.
| Primary Credit Analyst: | Tamara A Hoffman, New York (1) 212-438-3365; tamara.hoffman@spglobal.com |
| Secondary Contacts: | Senay Dawit, New York + 1 (212) 438 0132; senay.dawit@spglobal.com |
| Deegant R Pandya, New York (1) 212-438-1289; deegant.pandya@spglobal.com | |
| Research Contacts: | James M Manzi, CFA, Washington D.C. (1) 434-529-2858; james.manzi@spglobal.com |
| Tom Schopflocher, New York (1) 212-438-6722; tom.schopflocher@spglobal.com |
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