Commercial Securities Delinquencies Hit All-Time High

Published June 1, 2012

Commercial mortgage-backed securities have hit a record high delinquency rate, according to Trepp, LLC, a provider of information, analytics and technology to the CMBS commercial real estate and banking markets.

The delinquency rate for U.S. commercial real estate loans in CMBS jumped 24 basis points in May to 10.04 percent. In the process, the rate broke through the 10 percent threshold for the first time ever.

Last December Trepp predicted 2012 could be a rocky year for CMBS in terms of the delinquency rate. This prediction was in anticipation of five-year loans securitized in 2007 beginning to reach their maturity dates. At the time, the delinquency rate was around 9.51 percent. Trepp expected these maturing loans could lead to a spike in delinquencies of 70 basis points in the short term.

Delinquency Surge in May

It appears this has happened. Up 24 basis points in May alone, the delinquency rate has increased 67 basis points in total since February. Whether the rate finally breaching the double-digit mark will carry some psychological impact remains to be seen, said Manus Clancy, senior managing director at Trepp.

The good news for the CMBS market is that the five-year loans originated in 2007 were heavily front-loaded. This means that by the end of June, the number of these loans reaching their maturity date will start to dwindle.

“While cracking the 10 percent barrier might weigh on the market’s psyche for a short time, there are likely better days ahead in terms of delinquencies over the next six months,” Clancy said. “A big driver of the recent surge in the delinquency rate has come from loans that were originated in 2007 that are coming due now. As we get later in the year, the impact of this trend will dissipate. The next two or three months could be bumpy, but the second half of the year should bring a leveling off of the rate.”

$59.1 Billion in Loans Behind

Currently, $59.1 billion in loans are delinquent. This excludes loans that are past their balloon date but are current in their interest payments. There are $79.2 billion in loans with the special servicer.

The increase in the delinquency rate was driven by weak performance among hotel and industrial loans. Overall, four of the five largest property types saw delinquencies rise. Only the apartment sector improved, and that was by a single basis point.

— Staff report