By Erik Sherman
Along with bank liquidity issues, CMBS delinquencies are an important sign of CRE health. Possibly more so because they show not just trouble on the horizon but already in the rear-view mirror. A new Trepp analysis suggests that sometime in May, the red flags were starting to unfurl.
The CMBS delinquency rate jumped by 53 basis points to reach 3.62%, the largest increase since delinquencies were over 3% in June 2020.
“The increase in May 2023 was driven by a huge spike in office delinquencies,” Trepp wrote. “The office rate jumped 125 basis points to 4.02%. The last time the office rate was above 4% was 2018. At that time, many loans originated in 2006 and 2007 were still outstanding accounting for the high level. That is not the case currently.”
As Trepp noted, “Office has been the most heavily watched part of the market as firms look to aggressively reduce space.” But it is also more than that. Reducing space is a rational economic choice and something expected from a cold business view. There is nothing cold about the current state of office properties. It is a product of uncertainty, fear, and a loss of control over employees by employers when the jobs market continues hot. Executives recognize that they may be limited in what they can decide and enforce.
“Sublease space is at or near record highs in many markets as demand from big tech firms has eroded sharply,” Trepp says, invoking a titanic industry that finds its hands tied. Talented workers can often walk away and find something else. Companies that are open to remote work are at an advantage. “In addition, many companies are letting leases expire or are renewing with smaller footprints.” Those that can’t force people to come in at regular times may not have options. Google is giving up 1.4 million square feet in Northern California for sublease.
And Trepp didn’t include in its calculations any loans beyond their maturity date but current on interest. If it had, delinquency would be 4.99%. “The percentage of loans that are seriously delinquent (60+ days delinquent, in foreclosure, REO, or non-performing balloons) is now 3.38%, up 49 basis points for the month,” they wrote.
Beyond office, there are some other categories facing serious problems. Lodging delinquency is at 4.25%, retail at 6.67%, and multifamily, what should be a must-have property category with customers who need it, fell 36 basis points to is at a 1.46% delinquency rate. Small in comparison but showing that it had been at 1.82%.
The overall rate is still nowhere near the 10.32% Covid-19 high or the 10.34% in July 2012. Hopefully that will remain true, but keeping a close eye on developments would be prudent.