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Trepp’s Review and Outlook on Commercial Real Estate Market

October 21, 2020

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Key Takeaways

Trepp's head of Commercial Real Estate Finance outlined the current CRE market and looked at the future of CRE during Abrigo's recent ThinkBIG conference.
The overall CMBS delinquency rate in September declined from a near peak rate earlier this year.
Forebearances rose in September, topping $31 billion.

The pandemic's impact on CRE

This post by Hayley Collier, Trepp's Marketing Communication Specialist, was originally published on Trepp's blog and can be found here.

Trepp’s Head of Commercial Real Estate Finance, Joe McBride, whom readers and listeners may know from The TreppWire Podcast, spoke at Abrigo’s ThinkBIG Event recently. His presentation covered the current commercial real estate (CRE) performance and a look at the future of CRE. Here we have summarized the main takeaways from the session.

McBride’s presentation primarily covered the pandemic's impact on CRE. He began with a look at a Trepp chart which highlighted the percentage of loans in grace period on a monthly basis dating back to 2019. This was a new metric we began tracking in April, amid the disruption hitting the commercial mortgage market from COVID.

As McBride explained, the graph shows a relatively flat curve until March and April of this year, which is not surprising given that we started to see shutdowns at the end of February and into March. The greatest incline was represented in both the lodging and retail sectors, with lodging increasing to nearly 20% of the universe in grace period, and retail going up to just above 10%. These numbers did retract over the next few months, but McBride highlighted that this is not necessarily positive news as it appears, as the decline is likely because these loans transitioned into truly delinquent categories.

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CMBS delinquency rates declined in September

The overall CMBS delinquency rate in September came in at 8.92%, a decline of 10 basis points from the August number. The CMBS delinquency rate reached 10.31% earlier this year, and the peak ever was 10.34% in July 2012 so we reached almost the peak historically but have been slowly decreasing ever since.

While the delinquency rate is starting to decrease, McBride highlighted that the special servicing rate is continuing to increase. The difference in the delinquency and special servicing rate trend is based on the fact that while forbearances switch the loan status from delinquent to current, the loans, if stressed, still continue to be specially serviced.

McBride highlighted that although delinquencies are decreasing, if you look at each CMBS loan and the coinciding special servicing or watchlist comments and modifications, we may actually be in a higher percentage in terms of loans that have been struck.

This may leave some element of a shadow delinquency rate in the background. He added that we will not know until about three or four months from now just how many of those forbearance requests will bear fruit and will get back to truly paying their loans, but time will tell.

Forbearances rose to $31.2 billion, or about 800 CMBS loans

After speaking on delinquency rates, highlighting some of the Top 21 MSAs ranked by delinquency rates, McBride focused on the loan forbearance numbers. As of September, we now see that the forbearance tally has risen to $31.2 billion covering about 800 loans. The breakdown of this number is that about 64% of the forbearances granted thus far are for hotel loans and about 28% of the forbearances are retail loans.

This is up from July's reading when we noted that based on about 5,000 watchlist and special servicer comments, about $16.6 billion in CMBS loans had been granted some sort of relief.

Fannie and Freddie have reported around $15.1 billion in forbearances requested or executed, so a relatively similar percentage.

McBride then also highlighted that multifamily historically has done very well since the last recession, and is still doing fairly well, but there is a smaller portion of the universe – student housing, which we cannot say the same for. Beyond the hardest-hit retail and lodging CRE segments, specialized housing accommodations like student housing have been under immense financial pressure with concerns about safety displacing students out of on-campus facilities.

He does not expect this trend to stop but we are seeing some interesting innovations from student housing and lodging operators around college campuses.

Slightly lower loss rates seen than Fed's scenario

Next, Joe examined Trepp's research report which took first quarter 2020 loan-level bank data and ran it through the TreppDM model using Trepp’s main COVID scenario. This scenario used around 50% price declines on lodging, around 30% on retail, and around 25% office and multifamily. McBride explained that the data ran through this model allowed for a forecast of the loan level probability of default, loss given default and expected losses on these loans.

Some summary statistics that came out of that model:

The lodging probability of default peaked at around 6% and has started coming down as the economy recovers.
Retail inched up to the 1.5% area.
Everything else, including office and multifamily stayed right under that 1% area and decreased over time.

So, what does this all mean? McBride goes on to explain that the actual end-all-be-all loss and default rates are interesting because they have been compared to the Federal Reserve's Severely Adverse Scenario and the results were slightly lower in terms of loss rates. This could be because we did a deeper dive in terms of CRE prices, liquidity, and unemployment but also a much quicker recovery. To see more details on these loss rates, download our report here or contact [email protected].

Now, we are in a real-life scenario that is probably worse than the Severely Adverse Scenario, and McBride discussed the programs that have helped the CRE industry, including actions by the Fed and the PPP program which helped many businesses stay open and at least pay some of their rent. People are just waiting for a little bit of certainty on federal programs, government intervention and a vaccine, so these numbers are destined to change.

To learn more about any of these specific data points, contact [email protected] .