Fitch Ratings is tracking an unusual trend in commercial mortgage-backed securities delinquencies: the agency is seeing more large loans on older office and retail assets that had previously fallen delinquent making a return trip to special servicing.
This phenomenon has had a small impact on the CMBS delinquency rate, which rose by 3 basis points from December to January to 2.7 percent, according to Fitch’s most recent delinquency report. The increase is the first monthly increase in the delinquency rate since April 2021.
A prominent example is a loan on Brookfield Properties’ 1.4 million-square-foot office property at 175 West Jackson Boulevard in Chicago. The roughly $258 million loan was the largest delinquency cited in the report, with Fitch noting that it was transferred to special servicing in 2018 and again in November, said Melissa Che, a senior director at Fitch.
Older, less amenity-rich offices are having a particularly hard time maintaining interest compared to their newer competitors.
“It’s the older assets with more rigid layouts and more outdated plant and machinery that are going to struggle, especially with the uncertainty over how hybrid working arrangements will play out,” Che said. “These assets are inferior when competing with newer, LEED-certified buildings, as we see tenants’ flight towards higher-quality buildings. It has become harder for these older assets to distinguish themselves.”
Brookfield, which took control of the property in 2018, worked hard to stabilize the asset.
“The [sponsor’s] intent was to stabilize and inject new equity in to increase occupancy, and that never materialized,” Che said, adding that office leasing in Chicago is a difficult story.
Meanwhile, specially serviced Class B and C regional malls also helped to boost the delinquency rate. Four Glennbrook Square, Rivertown Crossing Mall, Westfield Citrus Park and Valley Hills Mall were added back to the delinquent list in January for at least the second time.
These malls’ prospects have only dimmed as the pandemic has dragged on. “[These malls] were struggling pre-pandemic as well,” Che said. “And then of course, the pandemic further exacerbated their issues. These are all generally weaker malls.”
Looking forward in 2022, Fitch is cautiously optimistic that delinquency rates will decline as the pandemic recedes and cashflows rise at properties.
“Occupancies have not recovered to 2019 peak levels but they’ve rebounded significantly from the lows of 2020,” said Stephanie Duski, director at Fitch. “The recent improvement in cashflow is allowing for excess cash to bring a loan current.”