S&P Global Ratings' quarterly review of the U.S. commercial mortgage-backed securities (CMBS) market reflects credit and issuance conditions, including delinquency and special servicing rates, for conduit and single-borrower transactions as of second-quarter 2024.

Delinquency And Special Servicing Rates Increased; Office Leads Both

The overall 30-plus day delinquency (DQ) rate for U.S. CMBS transactions was 4.8% as of June 2024--a 40 basis points (bps) increase quarter over quarter. The office DQ rate increased 100 bps quarter over quarter to 7.3% and is now the highest among the major property types. The lodging and retail DQ rates were also higher quarter over quarter, but they have improved considerably to 5.5% and slightly above 6.0%, respectively, after peaking at about 22.0% and 17.0% in 2020. Rounding out the five major property types, multifamily remained flat at 3.2%, while industrial continued to outperform with a 0.5% DQ rate.

These DQ rates have all benefitted from reperforming loans: a certain segment of loans that were previously delinquent but subsequently resolved and reclassified, including loans that failed to pay off at maturity and were extended by the servicer. To that end, we began tracking metrics associated with modified loans in our monthly credit report (see "SF Credit Brief: U.S. CMBS Delinquency Rate Rose 22 Bps To 4.8% In June 2024; Updates Provided On Modification Rate By Property Type," published July 1, 2024).

The overall special servicing rate increased approximately 80 bps in the second quarter to 7.3% as of June. For perspective, the recent peak was 9.5% in September 2020. The office and retail sectors lead with special servicing rates of 11.0% and 10.3%, respectively.

Surveillance And Rating Actions In Focus

Office sector stress has led to most of the CMBS downgrades over the past 12 months, as well as some realized losses.

S&P Global Ratings downgraded 344 CMBS classes and raised one class in the 12 months ended June 2024 due to credit tenant lease linkage (see chart 1). We believe this trend is unlikely to change amid higher-for-longer interest rates, the distress within the office sector, and the challenges associated with finding loan-term refinancing capital for certain malls. As a result, we also expect U.S. CMBS rating actions to remain biased heavily toward downgrades for the remainder of this year.

The Appendix below provides line-by-line detail on the most recent quarterly rating actions on U.S. CMBS, including transaction and class names, CUSIPs, property type, transaction type, and current and previous ratings. For greater transparency, we also include the rating affirmations.

Chart 1

We continue to see transaction-specific variations on the rating actions on single asset single borrower (SASB) office transactions, but the trend is overwhelmingly negative, given the considerable distress the sector faces. Factors driving the severity of the rating actions include the magnitude of changes in occupancy and the prospects for retenanting (recent market vacancy and subleasing trends), land value and location, lease rollover and maturity profile, etc. Downgrades have affected classes across the capital stack, including 'AA (sf)' and 'AAA (sf)' rated classes.

As a reminder, a rating committee's view of temporary versus longer-term impairment may determine how far up the capital stack ratings actions will go. Our ratings reflect timely interest and ultimate principal, and the servicer advancing mechanism provides some support to timely interest in the speculative-grade ('BB+' and below) and low-investment-grade ('BBB' and 'A') rating categories. A loan modification does not automatically trigger a downgrade. But loan modifications don't typically occur for "credit positive" reasons and, therefore, may trigger a review, which can result in a downgrade if we believe the risk profile has changed since our last review or the initial rating.

New Issuance Forecast Raised; SASB Is Booming

By the first-half of 2024, the $44 billon in conduit and single-borrower new issuance had already exceeded the $40 billion priced in full-year 2023. The issuance mix was approximately 70% SASB and 30% conduit as of June 2024. The conduits were a mix of the relatively newer five-year product and the more traditional 10-year transactions. Despite the challenges on the surveillance front, private-label CMBS issuance totaled about $26 billion in second-quarter 2024, excluding $1 billion in commercial real estate (CRE) collateralized loan obligations (CLOs).

We recently raised our full-year 2024 CMBS forecast to the $60 billion-$70 billion range. We also believe there is more upside potential to the forecast if the SASB market's torrid issuance pace continues.

Eight Conduits Priced

The second quarter saw eight new conduit CMBS transactions totaling about $7.5 billion, an increase from $6.0 billion in the first quarter (see table 1). We rated four of the transactions. The eight offerings had an average of 43 loans apiece, and an average deal size of $931 million. The high-level observations include the following:

• Overall loan-to-value (LTV) ratios rose 280 bps quarter over quarter, though the first-half 2024 and full-year 2023 levels are significantly lower than the 2021 and 2022 levels. The lower overall leverage reflects DSC ratio constraints. Average transaction sizes (and loans per transaction) increased quarter over quarter, but the transactions remained somewhat smaller and more concentrated compared to 2021 and 2022 levels.
• DSC ratios have generally been lower with the "higher-for-longer" benchmark interest rates, the average DSC fell modestly quarter over quarter. Cash flow and value variance levels have been stable to improving versus 2023 levels, and considerably better versus the 2021 and 2022 metrics.
• Interest-only (IO) percentages remained very high at 87.1% of pool volumes in the second quarter, though the full-term IO percentage decreased 5.7% from its first-quarter 2024 peak of 92.8%.

Table 1

Property Type Exposures: Retail Continues To Lead

Property-type compositions in conduit transactions continue to evolve with market conditions. Retail remains the clear leader in property type exposures, at 31.0% of total conduits in the second-quarter. Meanwhile, office bounced back a bit to slightly below 20.0% after declining the previous two consecutive quarters, and multifamily decreased 3.0% to 16.0% but remained elevated compared with 2023. We note that conduits have become a vital source of capital for office borrowers as other sources remain difficult to access.

The government agencies' (Freddie Mac and Fannie Mae) pull back on multifamily lending volumes due to DSC and other constraints has allowed private-label conduits to increase their share of multifamily volume. Industrial exposures increased to 11.0% from 9.0% and remained elevated from a historical standpoint, while lodging exposures remained steady in the low double digits. The "other" category (about 4.0% overall exposures) mostly consisted of mixed-use properties, with a slight increase in self-storage exposures during the past three quarters.

Chart 2

Single-Borrower CMBS

Thirty-four transactions totaling almost $19 billion priced in second-quarter 2024, up from $12 billion in the first quarter and $12 billion in the second half of 2023 (see table 2). We reviewed 24 of the 34 transactions and rated six: three were backed by hotels, two by multifamily properties, and one by a mixed-use property.

In the second quarter, we declined to provide rating feedback on eight transactions, compared with 10 (of 16 total) transactions in the first quarter. In previous quarters where we didn't provide preliminary ratings feedback, the main concern was typically high leverage. For the most recent period(s), we have declined feedback if the transaction did not cover debt service (on an S&P Global Ratings' cash flow and current SOFR basis) on day one. Though less frequent, we have also declined to provide ratings feedback for certain credit concerns, including single-tenant concentration.

Table 2

Hotels And Industrial Lead SASB Property Type Exposures

Hotels and industrial properties remain the most popular collateral for SASB transactions (see chart 3). Multifamily SASB issuance increased to over 10.0% in the second quarter, despite some pockets of declining rent growth (namely in the "Sun Belt"). Office SASB transactions have been less common, though a few were priced in the first half of the year. Data centers (which is categorized the "other" category), retail, and storage accounted for minor percentages of both first- and second-quarter offerings.

Chart 3

Appendix

Related Criteria

• SF Credit Brief: U.S. CMBS Delinquency Rate Rose 22 Bps To 4.8% In June 2024; Updates Provided On Modification Rate By Property Type, July 1, 2024
• CMBS Global Property Evaluation Methodology, Sept. 5, 2012
• Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012