By An Luke Lu, director, Yield Book mortgage research
Back in June, we published a blog examining how the first 100 days of the pandemic had impacted the CMBS market. We found that while the entire CMBS market had suffered a sharp decline at the onset of the pandemic, at the 100-day mark some real estate sectors were showing signs of recovery. If we look at the latest numbers, we can see that while some flickers of bright spots remain, the outlook for the CMBS market has become increasingly uncertain as spikes in COVID-19 cases persist throughout the US.
After reaching a near-historic high of 10.32% in June—just shy of their July 2012 historical peak of 10.34%—CMBS 30+ day delinquency rates have dropped in July. As shown below, rates declined across all real estate sectors for the month-over-month period.
Source: Smith Travel, as of August 2020
We can attribute this improving data in large part to maturity extension, forbearance, and property cures. But while it might appear these figures point to a continued recovery, the special servicing rate—which is a future delinquency indicator—rose from 8.28% in June to 9.49% in July, driven primarily by higher hotel and retail special servicing rates.
Nonetheless, hotel data since June has been largely positive. Occupancy has continued to climb from March lows, rising week-over-week for 16 of the last 17 weeks and reaching 49.9% for the week ending August 8. However, as shown below, hotel occupancy, rates, and revenues are still well below where they were for the same week one year ago
Source: Trepp, as of August 2020
While much of the improvement in hotel occupancy since March can be attributed to more people venturing out on vacations to drive-to destinations, revenue from business travel/conventions isn’t likely to return any time soon—particularly as many states have enforced strict quarantine rules for out-of-state travelers.
The multifamily sector is currently holding up well, with 93.3% of apartment households having paid rent as of July 27—only 2% lower when compared to same period last year (based on the National Multifamily Housing Council rent payment tracker). Delinquencies, although rising, have stayed relatively low, with non-agency CMBS 30+ day delinquency at 3.33% in July. Agency multifamily is another bright spot, with GSEs actively pursuing relief measures such as forbearance for loans in trouble due to COVID-19. However, with the $600 weekly unemployment boost having expired at the end of July, the multifamily sector could be poised to face significant headwinds as Congress struggles to reach an agreement on a new relief package.
Similarly, while the office sector has yet to show signs of real distress, several concerns make for an uncertain outlook. Long-term leases and diversified tenants have buoyed office sector performance throughout the pandemic, but as many office buildings continue to sit empty while employees work remotely, questions arise as to how long tenants will continue to pay rent. And for those leases expiring in the near-term, whether or not tenants renew the lease—and if so, at what capacity and rate—also remains uncertain. A recent increase in sublease listings could signal that many leases will be renewed at a lesser capacity.
The retail sector continues to be dogged by bankruptcies and store closings, particularly in shopping malls, whose owners are finding it increasingly difficult to cover debt service. As the pandemic has triggered paradigm shifts in consumer behavior, shoppers are increasingly taking their business online—expediting a trend already underway before the pandemic’s onset. As such, shopping malls are now facing the existential question as to whether they are destined to become obsolete.
All of these factors continue to reshape the CMBS market story, and the V-shaped rebound that appeared to be underway in June now looks less certain. Continued spikes in COVID-19 cases across the US, scaled back reopening plans, and a record Q2 drop in GDP have made for a deteriorating macro backdrop since June. However, there could be relief in sight, as a new bill was recently proposed to Congress—Helping Open Properties Endeavor (HOPE) Act—to provide economic support for the commercial real estate market by assisting hotel and retail owners with their debt payments. Whether or not this is the next chapter of the story remains to be seen, but as we enter the 6th month of the pandemic, we’ll continue to monitor how it impacts the US CMBS market.
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