Fitch Ratings is projecting that pandemic-related stresses on vulnerable commercial properties, including retail and hotel, will lead to U.S. CMBS loan delinquency levels approaching peak levels of the financial crisis era, the ratings agency reported Thursday.
Based on a steep decline in economic activity and the impact of mass unemployment levels, Fitch is now forecasting a delinquency rate of between 8.25% and 8.75% by the end of the third quarter for loans held in commercial mortgage backed securities rated by the agency.
That approaches the peak mark of 9.01% the industry faced in July 2011 during the prolonged recessionary period that began in 2008, according to Fitch, and compares to a rate of just 1.31% as of March. Fitch rates a combined $468 billion in CMBS portfolios.
The delinquency levels do not take into account forbearance programs.
Fitch states its delinquency projections are primarily focused on property types most vulnerable to the impact of the coronavirus outbreak: lodging, retail, student housing and single-tenant properties with “non-credit worthy tenants.”
Near-term hotel delinquency rates will jump to about 30%, while retail will rise up to approximately 20%, compared to the rates of 1.44% for hotels and 3.51% for retail properties last month. Those projected rates will surpass their prior peak levels of 21.31% for hotels and 7.67% for retail recorded nearly a decade ago.
Hotels will suffer steep cash declines from “significantly reduced travel and tourism,” while the weak retail segment will undergo a series of bankruptcies. “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,” the report stated.
Owners of Class B and Class C malls and outlet properties will have difficulty accessing capital to either retain tenants or inject equity to avoid default. Regional mall and outlet loans with 2020 maturities “are also at higher risk of defaulting due to scarce liquidity for this property in the current environment.”
Less affected will be “top tier” regional malls with strong sponsorships and high inline sales greater than $500 per square foot, as well as properties with tenants in essential industries such as supermarkets, pharmacies and banks.
The uptick in multifamily delinquencies will be driven by two factors: apartments with high concentrations of tenants who work in fields hard hit by amassing unemployment levels (oil and gas, service sector), and student-housing properties that are vacant due to closed college campuses.
Office properties with high exposure to co-working tenant space (such as those associated with WeWork) will also see a rising level of defaults.
The spike in defaults occuring over the next few months will be accompanied with a decline in new issuance volume of commercial MBS transactions over the next six months, as well as fewer maturing loans and fewer resolutions by special servicers.
