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U.S. CMBS Delinquencies Projected to Approach Great Recession Peak Due to Coronavirus

April 20, 2020, 09:15 AM
Filed Under: Economy

Fitch Ratings expects U.S. CMBS loan delinquencies to approach peak levels, with hotel and retail expected to have the highest delinquency rates.

Although the delinquency rate has been steadily declining, and was 1.31% as of March 2020, it will now start to rise and peak between 8.25% and 8.75% by the end of the third quarter of 2020; this expected rate is close to the peak of 9.01% reported in July 2011 during the Great Recession. Fitch's projection assumes not only a significant spike in defaults over the next few months, but also declining new issuance volume during the second and third quarters of 2020, fewer maturing loans and fewer resolutions by special servicers.

Fitch's delinquency projection focuses on the property sectors most vulnerable to the coronavirus pandemic, which Fitch designates as hotel, retail, student housing and single-tenant properties with non-credit worthy tenants.

Fitch expects the hotel and retail delinquency rates will increase to approximately 30.00% and 20.00%, respectively, in the near term, up from 1.44% and 3.51% as of March 2020; both the projected rates will surpass their prior peaks of 21.31% and 7.67%. There will be substantial near-term cash flow declines for hotel properties due to significantly reduced travel and tourism, as well as property closures. Bankruptcies will be brought forward for weaker retail tenants. Fitch expects a number of retail tenants will stop paying rent in the short term, adding further cash flow pressure to those loans that already had weak performance prior to the coronavirus pandemic. Loans secured by class B & C malls and outlet properties in secondary and tertiary markets with weak sponsorship that have limited ability to access capital to retain tenancy and/or inject additional equity are expected to default. Regional mall and outlet loans with maturities in 2020 are also at higher risk of defaulting due to scarce liquidity for this property in the current environment. Loans secured by top tier regional malls with strong sponsorship and inline sales greater than $500 per square foot will be less affected. Retail properties with tenants in essential industries, such as supermarket, pharmacies and banks, will be less affected.

Fitch expects an uptick in multifamily delinquencies, primarily in the student housing sector due to colleges closing their campuses, as well as those with high concentrations of hourly wage employees, service employees with interaction with the public and employees in the oil and gas industry. Fitch assumes bad debt expense at these properties will increase to Fitch's unemployment assumption at or above 10%.

Fitch expects single-tenant loans, primarily those with non-credit worthy tenants and/or leases rolling in the next two years are at risk of defaulting. Office loans with a high exposure to co-working tenancy will also be affected.

These delinquency projections do not factor in forbearance. Fitch expects delinquencies may be delayed or understated due to borrowers being granted short-term forbearances. Fitch will continue to monitor and update our delinquency expectations as our assumptions change during the coronavirus pandemic.

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