September Improvement

By Jessica Cavallero and Deegant Pandya

Source: Standard & Poor’s,, Deegant Pandya, 212-438-1289

Source: Standard & Poor’s,, Deegant Pandya, 212-438-1289

Delinquency rates in Standard & Poor’s-rated U.S. commercial mortgage-backed securities (CMBS) declined in September 2014. The delinquency rate dropped 14 basis points month over month to 6.79 percent, offsetting two consecutive months of increases. A decrease in newly delinquent loans and the steady pace of property liquidations contributed to the previous month’s positive performance.

Overall, Standard & Poor’s CMBS delinquency levels have declined across the major CMBS property types as a result of improving commercial real estate market fundamentals and ongoing liquidity in the refinance market. We expect an uptick in loan defaults and modifications in the coming year with the expected wave of near-term maturities, specifically the volume of 10-year commercial real estate loans maturing starting in 2015.

The month of July marked the first increase in delinquencies we have observed in the past 16 months, with the rate rising six basis points from March 2013. However, year-over-year, the September delinquency rate dropped 177 basis points from 8.56 percent.

The total balance of delinquent loans fell across all five major commercial real estate property types month over month, with lodging assets retaining the lowest delinquency rate at 5.74 percent in September. The lodging sector has also seen the steepest decline, with the delinquency rate dropping 385 basis points since September 2013.

The multifamily segment’s September delinquency rate of 8.42 percent has started to level off, its decline dropping only six basis points since January but 175 basis points when compared to September 2013. The office property sector dropped 243 basis points and industrial dropped 170 basis points year over year to 7.2 percent and 8.48 percent, respectively.

Similarly, the retail sector, with a September delinquency rate of 6.93 percent, has started to level off since January, declining nine basis points and a total of 48 basis points since September 2013. However, the delinquency rate for retail has increased 39 basis points when compared to the previous quarter at 6.53 percent.

Lastly, the average September loss severity rate on $723 million in liquidated loans in Standard & Poor’s-rated CMBS was 41 percent. Of the $1.4 billion in resolutions, 48 percent of loans became current and 52 percent were liquidated. The total volume of resolutions has stabilized across the past six months, down approximately 50 percent from the uptick of the CW Capital liquidations in the first quarter.

The monthly loss severity rates by property type ranged from retail at 51 percent to industrial at 20 percent. Despite a wide range of historical severity rates between property types, the overall loss severity has been relatively stable, hovering at approximately 40 percent.

—Jessica Cavallero is a Rating Analyst and Deegant Pandya is a Senior Director at Standard & Poor’s Ratings.