Priya Patel
The delinquency rate for commercial mortgage-backed securities (CMBS) fell to 4.21% in December, according to Kroll Bond Rating Agency. This marks a reversal of November’s increase in the delinquency rate, suggesting short-term improvement in the sector. However, a report by Bloomberg highlights that some underlying issues within the CMBS market are likely to persist in the new year. Throughout 2023, sector downgrades outpaced upgrades, largely due to loans maturing into a higher interest rate environment or remote work-related vacancies. While recent statements by monetary policymakers about possible cuts to the federal funds rate may mitigate some of these concerns, they are unlikely to resolve the broader issues affecting the CMBS market.
The delinquency rate for CMBS is relatively high compared to other forms of commercial property financing. Kroll researchers have found that downgrades have been concentrated in speculative-grade securities in higher risk categories. However, in the past two months, there has been increased concern for two property sectors that typically have lower delinquency rates: multifamily and retail. Multifamily delinquencies rose by 30 basis points to 3.39% in December, while retail delinquencies increased by 27 basis points to 0.71%. Mixed-use properties had the highest delinquency rate at 7.45%, although this represented a drop of 223 basis points from the previous month, due to maturing loans in a rate-sensitive market.
While the overall delinquency rate for CMBS improved in December, the bankruptcy filing of JER Investors highlights vulnerabilities in the commercial market. In addition to JER, both Pennsylvania Real Estate Investment Trust and WeWork have filed for bankruptcy due to ongoing stress in the commercial real estate sector. The Mortgage Bankers Association has also reported elevated delinquencies across capital sources, indicating that this is a broader concern within the industry.
In summary, while the overall delinquency rate for CMBS improved in December, there are still underlying issues within the market that are likely to persist. The rate of downgrades has outpaced upgrades, with loans maturing into a higher interest rate environment and remote work-related vacancies causing significant challenges. The bankruptcy filings of JER Investors, Pennsylvania Real Estate Investment Trust, and WeWork highlight the ongoing stress within the commercial real estate sector. The delinquency rate for specific property sectors, such as multifamily and retail, has also increased, indicating the broader impact of these challenges.
