The overall US commercial mortgage-backed securities loan delinquency rate could increase to 4.5 percent in 2024 as maturity defaults and other issues emerge, according to a December report from Fitch Ratings.
The New York-based rating agency tracked a delinquency rate of 2.25 percent in November but is expecting to see rising delinquencies and transfers into special servicing. Investors will need to watch how servicers approach maturities, arrange loan modifications, and how appraisal valuations are utilized more closely, the report said.
Ed Shugrue, portfolio manager at New York-based manager RiverPark Capital, noted loans transferring to special servicing doesn’t necessarily mean the whole capital stack is exposed to losses. “You may lose the equity, you may lose the [mezzanine debt], and maybe there’s some friction in the junior CMBS tranches but not usually any losses beyond that.”
Shugrue added servicers also can modify loans if they want to wait until a better transaction environment.
“Servicing is created to maximize the recovery of the CMBS trust, so I think as long as they’re cash-flowing, and people think the interest rates will be lower or fundamentals will be better, then the servicer wants to keep doing short-term extensions until the property owner can sell off the property, pay it down or refinance,” he added.
Meanwhile, a report from New York-based Kroll Bond Rating Agency provided additional metrics for the market today. The agency found a higher percentage of downgrades on commercial real estate securitizations this year.
Additionally, the total rate of delinquent and specially serviced loans KBRA tracked increased 207 basis points from 2022 to 7.1 percent. The increase was led by delinquencies in the office and mixed-use sectors. In addition, the same distress indicator fell for retail and held steady for lodging and multifamily.
Looking ahead for 2024, KBRA also projected a meaningful number of downgrades that are potentially driven by office loans. However, the agency also believes the issuance of CMBS will bounce back with a 24 percent increase if the market sees a steady interest rate environment and no major volatility in the macroeconomic scene. The resurging transaction volume could be also led by more borrowers accepting “higher-for-longer” interest rates and lower valuations, KBRA’s report noted.