CMBS delinquencies drop but new bankruptcy shows issues persist

Commercial mortgage-backed securities arrears showed short-term improvement on the whole in December after a challenging year, but it was still a tough month for some property types and players.

The delinquency rate fell to 4.21%, reversing November's 19-basis-point uptick, Kroll Bond Rating Agency reported Tuesday.

But as a Bloomberg report about JER Investors' recent Chapter 11 filing and longer-term trends suggest, some underlying issues aren't likely to entirely abate in the new year.

Sector downgrades ran at a rate nearly twice that of upgrades for most of 2023, primarily due to loans maturing into a higher rate environment or remote work-related vacancies.

Monetary policymakers' recent statements about possible cuts to the federal funds rate may be relieving one of these concerns, to a limited extent.

"We believe additional rate increases are behind us," said Eric Thompson, senior managing director and global head of structured finance at KBRA, during a recent press conference the rating agency held on its 2024 outlook.

Lower CMBS ratings will likely keep outpacing upgrades this year but the rating agency's researchers said in a related report that they "do not expect to see meaningful changes in the breadth and magnitude."

The continuing stress may continue to be more manageable for some players than others.

In addition to JER, Pennsylvania Real Estate Investment Trust and WeWork have filed for bankruptcy due to vulnerabilities in the commercial market.

While the Mortgage Bankers Association recently found elevated delinquencies across investor types in its more recent quarterly report, suggesting it's been a concern across capital sources, the trend may be more pronounced for CMBS, which have a relatively higher arrears rate.

Within CMBS, Kroll researchers have found downgrades to date have been concentrated in speculative-grade securities in higher risk categories.

But in the past two months, KBRA noted increased concern for two property sectors that tend to have lower delinquency rates than others.

In December alone, multifamily increased 30 basis points to 3.39%. Retail rose by 27 basis points to 0.71%.

Mixed-use properties had the highest delinquency rate for December at 7.45%. That number was down 223 basis points from the month before, but the dramatic drop appears to stem from maturing loans in a rate-sensitive market, a circumstance that can raise the potential for large swings in either direction.

The decline stemmed from a $340 million commercial mortgage previously in special servicing resolving a short-term delinquency and becoming a performing, matured balloon loan. (Commercial mortgages often have balloon payments due at maturity.)

Meanwhile, another $370.6 million loan transferred into special servicing and could face "an imminent maturity default," the KBRA report noted.

Office loans in CMBS had a 4.79% delinquency rate, marking a reduction of 14 basis points from November. The other three sectors KBRA tracks also reported single-digit basis-point declines. 

The arrears rate for retail fell 3 basis points to 4.79%. Lodging was down 4 basis points at 2.92%. Loans backed by other miscellaneous property types fell 2 basis points to a 2.82% delinquency rate.