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 third-quarter 2024.

Delinquency And Special Servicing Rates Increased; Office Modifications Rising

The overall 30-plus day delinquency (DQ) rate for U.S. CMBS transactions rose 40 basis points (bps) quarter over quarter to 5.2% as of September 2024. The office DQ rate increased 82 bps quarter over quarter to 8.2% and remains the highest among the major property types, followed by retail (6.6%) and lodging (5.4%). We noted that many office loans are becoming delinquent upon (or leading up to) their maturity or refinancing dates; and there has been a spike in 2014 vintage loan delinquencies, given the common 10-year loan tenor. The multifamily DQ rate rose 94 bps to 4.2%, while industrial continued to outperform with a 0.3% DQ rate.

The delinquent loan population is perhaps understated, given that the percentage of modified loans are also increasing. As of September 2024, modified loans represented approximately 10.4% ($75.4 billion) of the $724.7 billion total U.S. CMBS outstanding balance, up from just under 10% as of the second quarter. Some of this is more a function of the legacy modifications (mostly lodging and retail) that were allowed soon after the onset of the COVID-19 pandemic and not an accurate indicator of current sector stress. However, the 7.6% and 10.0% modification rates for office and multifamily, respectively (which have risen in recent months), are of some concern (see "SF Credit Brief: U.S. CMBS Delinquency Rate Rose 34 Bps To 5.2% In September 2024; Office Rate Surges Past 8.0%," published Sept. 27, 2024).

Meanwhile, the overall special servicing rate increased approximately 40 bps quarter over quarter to 7.7% as of September, which is still below the recent peak of 9.5% in September 2020. The office and retail sectors lead with special servicing rates of 12.3% and 10.6%, respectively.

Surveillance And Rating Actions

Over the past 12 months, the office sector represented most of the CMBS downgrades and some of the realized losses, with 487 CMBS classes downgraded during that period. Even with the Federal Reserve beginning to cut short-term rates, we believe this trend is unlikely to change during the next few months due to distress within the office sector and borrowers facing difficulty finding long-term refinancing capital for certain malls.

Chart 1

Many office-backed single asset single borrower (SASB) transactions experienced downgrades across the capital stack in the third quarter, including 'AAA (sf)' and 'AA (sf)' rated classes, due to sharp valuation declines and deteriorating leasing conditions. The trend remains negative, despite some variation based on certain transaction characteristics, such as location, occupancy and rent roll, and loan maturity profiles (see "U.S. And European Commercial Real Estate Market Stress Reflected In CMBS Downgrades," published July 9, 2024). In addition, though to a far lesser extent, more seasoned conduit pools that have paid down and contain mostly (or solely) distressed office and retail loans have experienced downgrades.

As a reminder, S&P Global Ratings' rating committee's view of temporary versus longer-term impairment may determine how far up the capital stack ratings actions will go, and the severity of the action. 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.

The Appendix table 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.

Rated Exposures To Hurricanes Helene And Milton Exceeds $2 Billion

Hurricane Helene passed through several states between Sept. 27 and Sept. 29, 2024, and left a trail of destruction in Florida, Georgia, South Carolina, and North Carolina. Other states such as Alabama, Tennessee, Kentucky, Virginia, and West Virginia were also affected but not to the same extent.

As of Oct. 4, over 100 counties in those four states qualified for public assistance from FEMA due to hurricane Helene: approximately 20 in Florida, over 40 in Georgia, about 15 in South Carolina, and around 25 in North Carolina. While damages were experienced across a large land area, four metropolitan areas worth noting due to the severity of the damages or the population density: Tampa, Fla.; Savannah, Ga.; Charleston, S.C.; and Asheville, N.C. In addition, Tampa, and a much larger section of Florida, were affected by Hurricane Milton on Oct. 10, which will likely lead to additional FEMA public assistance within numerous Florida counties.

The CMBS transactions we rate include 446 loans totaling over $13.9 billion on properties located within these four cities (see table 1). However, many of these are portfolio loans that are secured by multiple properties located across multiple states. Therefore, we narrowed the property counts and allocated loan exposures to 202 properties totaling $2.3 billion (see table 2). The Tampa, Fla. metropolitan area has the largest exposure at $1.6 billion across 142 properties. The largest exposure within Tampa is the Bowery Bayside Stepstone, which has an allocated loan balance of $99.6 million, secured by a 608 units multifamily property built in 1986.

We expect many borrowers will have business interruption insurance that will serve as a temporary gap, allowing them to continue making debt service payments in the near term. Longer term, insurance proceeds should help with the rebuilding efforts if the property sustained damages. Still, some borrowers may be underinsured or may lack flood insurance for properties located in areas that are not flood prone. We will continue to monitor the developments and performance of the loans secured by properties in the affected areas.

Table 1

Table 2

New Issuance Forecast Raised Again; SASB Is Booming

The $74 billion in new CMBS issued in the first nine months of 2024 considerably exceeded the $40 billion issued in full-year 2023. The issuance mix was approximately two-thirds SASB and one-third conduit, with the conduits comprising a mix of relatively newer five-year transactions and more traditional 10-year transactions. Private-label CMBS issuance increased to about $29 billion in the third quarter, up from $26 billion the previous quarter.

We have raised our full-year 2024 CMBS new issuance forecast to $90 billion from $80 billion, based on our view that the CMBS issuance market has largely shrugged off the prevailing credit concerns or uncertainty from the upcoming elections. This optimism likely reflects the Federal Reserve's recent rate cut, the expected "soft-landing" for the U.S. economy, and our view that office market sentiment may be bumping along at, or near, a bottom as office worker attendance data show modest signs of improving.

A Dozen New Conduits Were Issued In Q3

Third-quarter CMBS issuances included 12 new conduit CMBS transactions totaling about $10 billion, an increase from eight transactions totaling $7 billion in the second quarter and seven transactions totaling $6 billion in the first quarter. Of the 12 transactions issued in the third quarter, we reviewed 11 and rated two. These 12 offerings each had an average of 35 loans and an average deal size of $862 million. The high-level observations include the following:

• Overall loan-to-value (LTV) ratios rose for the second consecutive quarter, up 330 bps to 86.7%. Average transaction sizes (and loans per transaction) decreased quarter over quarter, and the transactions were smaller and more concentrated compared to 2021 and 2022 levels.
• Debt service coverage (DSC) ratios have generally been lower with the "higher-for-longer" benchmark interest rates, and the average DSC fell modestly quarter over quarter. A higher-than-usual concentration of multifamily loans (see next section) may have contributed to the lower DSCs, as these are typically underwritten to lower coverages versus other major property types. Cash flow and value variance levels have been relatively stable in 2024.
• Full-term interest-only (IO) percentages remained high at 86.7% of pool volumes in the third quarter, though declining from the 92.8% peak in the first quarter. Partial-term IO loans have become less common, especially with the introduction of five-year term transactions.

Table 3

Property Type Exposures: Multifamily Rising

Property-type compositions in conduit transactions continue to evolve with market conditions. Multifamily exposures rose significantly to 25% of conduit transactions in the third quarter, compared with 16% in the second quarter and 8% in third-quarter 2023 (see chart 2). 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 (and SASBs) to increase their share of volume.

Retail exposures, which also represented 25% of conduits, remain mostly stable. Recent performance has been generally positive for the sector, except the dearth of long-term capital for still-struggling malls.

Offices held mostly steady, with 21% of conduits, up slightly from 19% in the second quarter. Conduits have become a vital source of capital for office borrowers as other sources remain difficult to access. While we continue to see some office SASB transactions (only three priced in the third quarter), they tend to be very selective for traditional properties, or medical offices, where in-person work is necessary.

Lodging has been steady, representing 13% of conduits. Performance remains mostly positive for now, though there are some doubts regarding the sustainability of elevated average daily room rates.

Meanwhile, industrial exposures fell to 7% of conduits, and the "other" category (9%) mostly consisted of mixed-use (4%) and self-storage (3%) properties.

Chart 2

Single-Borrower CMBS

Some 27 transactions totaling over $18 billion were priced in third-quarter 2024, similar to the 34 transactions totaling $19 billion priced in the second quarter. We reviewed 19 of the 27 transactions and rated one, which was backed by a hotel portfolio.

We declined to provide rating feedback on seven transactions in the third quarter, compared with eight in the second quarter and 10 in the first quarter. Our main credit concern for not providing feedback in recent quarters has been 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 4

Multifamily Leads SASB Exposures; Hotel And Industrial Still Popular

Following gains in the second quarter, multifamily surged to 31% of SASB transactions issued in third quarter--the highest among all property types. Hotels and industrial properties remain popular collateral for SASB transactions at 29% and 14% of deal volume, respectively (see chart 3). Office SASB transactions have been less common, though three priced in the third quarter, accounting for a 9% share. Retail (8%), mixed use (5%), and data centers (4%; marked as "other") rounded out the list.

Chart 3

Appendix

Related Criteria

• CMBS Global Property Evaluation Methodology, Sept. 5, 2012
• Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012