Analysis by David Salz and Thomas P LaSalvia, PhD
In our review of August’s remittances, we’ve noticed some conflicting data, in addition to a multifamily sector displaying its first sign of pandemic related stress. While the overall delinquency rate is fairly stable and even showing signs of decline, the volume of special servicing remains stubbornly high and is inching higher. In certain cuts of the data, we even see sector-specific conflict in terms where stress is hiding and likely to show up in the near future. Specifically, this week we compare month over month data, focusing on a population that includes loans whose servicer comments contained “COVID-19” but not “cancel” (which is used in the comments to indicate the cancellation of relief).
Interestingly, the July and August loan and balance counts within this population are relatively steady across sectors. What is less steady is the payment status of the borrowers with COVID-19 concerns. In July we noticed that a large proportion of “concerned” borrowers were current in the multifamily, office, and industrial sectors. Shifting to August, the percentage of loans paying on time for multifamily (both agency and non-agency multifamily) is decreasing. Is this the beginning of growing stress for a sector many consider the darling of CRE? Overall, we expect multifamily to continue to hold up better than retail and lodging, but the uptick in delinquency for this group must be watched. Further, the evidence of some stress does coincide with a multitude of other issues in multifamily. Namely, the CARES act has expired, we have stalled relief packages in Congress, August showed a further decline in on-time tenant rent payments, another half a million people became “permanently” unemployed in August, and data collected by Moody’s Analytics REIS through July and August showed asking and effective rent declines for the sector.
Moreover, the recent CDC eviction moratorium could spell trouble for landlords and borrowers with thin margins. There has been some movement in CMBS relief from Congress, but nothing is concrete or imminent. Consequently, the pressure could move towards special servicers, who are already burdened with a multitude of requests from the lodging and retail sectors.
Finally, month over month, the only improvement in this dataset was in lodging. This was mostly expected and is consistent with the higher level of forbearance given the utilization of existing reserves to cover debt service.
David Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, providing timely and insightful data analytics to CMBS and CRE professionals. Prior to his current role, he managed the ABS desk and worked on various CLO related projects.
Thomas P LaSalvia, PhD is a Senior Economist in the research and economics department at Moody’s Analytics REIS.