A significant CMBS delinquency rate surge occurred in June 2020 (a 10.32% overall delinquency increase), according to Trepp, a commercial real estate intelligence company.
As per Trepp, aggregate delinquency rates increased 317 basis points over the May number, reaching 10.32%; very nearly the highest CMBS delinquency rate on record. About 5% of that number represents loans in the 30 days delinquent bucket while another 3.2% are now 60 days delinquent.
What is CMBS?
The acronym CMBS means “commercial mortgage-backed security.” In other words, these are the bonds issued by large commercial real estate firms that securitize bundled cash flows of commercial real estate mortgage payments. An increase in delinquency rate implies a higher likelihood of default on the underlying bond.
What does a CMBS Default Surge Mean to My Business?
What the month-over-month CMBS delinquency rate surge means is this: lessees are not making a sufficient level of lease payments to commercial real estate owners; with the knock-on effect that commercial real estate owners are missing payments to securitized bond holders.
The CMBS delinquency rate surge portends a material shift in negotiating power in restructuring commercial leases for businesses of every size.
What Sectors Were Hit Hardest?
Of the various CRE sectors showing delinquencies, it is no surprise that retail mortgage bonds showed the highest marginal delinquency increase (4.44% increase), followed by bonds secured by office spaces (3.02% increase) then bonds secured by lodging properties (2.41% increase). A chart of mortgage delinquencies by property type is here.
A Shift in Negotiating Power
As mentioned above, the CMBS delinquency rate surge suggests a material shift in negotiating power in restructuring commercial leases for businesses. This negotiating power shift is also reinforced by the fact that a California senate bill was introduced that would have required a moratorium on commercial evictions. While the bill ultimately died in committee, the groundwork has been laid for businesses of every size to exercise greater negotiating power in lease restructuring.
We assist businesses in restructuring their obligations, including commercial lease obligations. If we can help your business with this process, please give a call: (213) 600-6077–ask for Kevin McBride.