CMBS: Stressed Vintages in Lodging and Retail CRE Loans

With approximately 10% of the CMBS reporting in July, early trends indicate a continued increase in both longer-term delinquencies and special servicing. Retail and lodging remain a top concern for the market, so this week we narrow our perspective on these two sectors, focusing on the origination vintages exhibiting the most distress.

During the past four weeks, Retail loans originating between 2014 and 2016 entered special servicing at a faster rate than other vintages. While the Mall of America loan is dominating the 2014 list, elevated rates for the 2015 and 2016 vintages are consistent with stress found for mid to late-cycle vintages in other recessionary periods. During the Financial Crisis, CMBS delinquencies were overwhelmingly found in originations from 2004 to 2007. Economic theory dictates an uptick in speculative development during mid-to-late-cycle. As absorption outpaces the minimal early-cycle new inventory, developers and lenders are likely to take slightly more risk in green-lighting projects. Consistent with this theory and the elevated 2014 to 2016 loan balances, REIS construction data shows a rise in activity during this period, with completions peaking in 2017; surely some of these projects being of the speculative nature. It is noted that the securitize balance of retail loans went down after 2016, even as the amount of CMBS issuance increased. Further, we also looked for evidence of underwriting changes via a weighted average debt service coverage ratio (DSCR) at origination, but did not see great variations among vintages. We will continue to dig deeper in the coming weeks.

In terms of lodging, the 2015-2017 vintage period is quite concerning as it represents a disproportionate amount of loans in special servicing, even though lending activity peaked for the sector between 2017 and 2019. Interestingly, for lodging we do see variation in weighted average underwritten DSCR. For lodging loans starting in 2017 DSCR dramatically spikes, despite lodging comprising a greater percentage of CMBS issuance. Given industry chatter regarding oversaturation of the lodging sector, we speculate that the rise in DSCR is due to lenders becoming aware of this potential problem late 2017 and requiring stronger fundamentals.

Chart 1

Retail and Lodging Loans Added to Special Servicing in Past 4 Weeks by Vintage

Chart 2

Outstanding Balance of Retail and Lodging Loans by Vintage, 2010-2019

Chart 3

Underwritten DSCR for Retail and Lodging Loans by Vintage, 2010-2019

As data continues to pour in during the next week, we will work to unravel the interesting story behind variations in vintage stress, as well as report on other emerging trends.

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