Early Trends in CMBS Loan Modifications

As servicers continue to process the damage from COVID-19, this week we focus on the trends in loan modifications for the most affected property types: lodging and retail. While it is still early in determining the best course of action for many of these loans, we are seeing a much higher rate of lodging loans being modified than retail (in terms of both the number of loans and loan balance). Further review of the comments related to these modifications indicates that most of the lodging modifications involve releasing reserves. Retail loan modifications, on the other hand, include a mix of forbearance of payments over a limited time period and a release of reserves.

In closely monitoring the diverging trends, early evidence points toward a combination of operational differences and industry sentiment. Generally speaking, retail establishments run very lean in terms of liquid assets.  Restaurants often have no more than a few weeks of reserves to call upon in adverse situations. In contrast, large hotel chains typically operate with greater reserves and have more options, including borrowing against loyalty programs. Options have value, and in this circumstance, servicers may be more inclined to modify hotel loans given that value.

Additionally, the pandemic has accelerated structural change in the retail sector that is yet to be seen in lodging. Every week, news of additional retail bankruptcies or store closures finds their way to the headlines, fueling a greater level of uncertainty for a sector that was already challenged prior to COVID. This uncertainty could further reduce a servicers willingness to “kick the can” on what may be inevitable. The lodging sector is not immune to these uncertainties, but the short-run structure is less subject to change. Households are also showing some willingness to travel as occupancies are trending up from a spring-time low of near 20%, although a recent rise in infections may cause that number to tumble once again.

 

Loan Balance with Servicer Comments Mentioning COVID or Forbearance by Property Type

 

We will continue to watch modifications closely, as they are a good indicator of market sentiment and show where mutually beneficial agreements are able to be made.

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