MARKET INSIGHTS
April 28, 2020

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

Bruce Springsteen released his “Born in the USA” album in 1984, which included a top 10 single titled “I’m Goin’ Down.”

Vampire Weekend, an indie band more popular with my daughters, did a rendition of that song in 2010.

Today, many commercial real estate investors are feeling the same sentiment expressed in the song — a slipping away of the love received just a few months ago from tenants and lenders alike.

Trepp LLC, a New York-based analytics firm that collects data on publicly traded commercial mortgage-backed securities and tracks payments on more than $876 billion in commercial real estate loans, has indicated that early data for April show delinquencies rising.

While defaults generally are not recorded until payments are more than 30 days past due, an astounding 8.8% of borrowers haven’t paid their mortgage for April yet, according to Trepp.

The data is not concrete but does serve as an early indicator on what’s to come, particularly when compared to the same percentages in March.

Predictably, loans backed by hotels and retail properties are showing up as the most likely to default in April.

About 21% of hotel loans and 11% of retail loans cited in the Trepp research had not posted their April payments as of 10 days ago. Conversely, about 5% of multifamily and industrial loans had not paid and surprising few loans backed by office tenants showed up as late — only 2.4%.

The problem, of course, is that hotels and retail properties are on the front line of the commercial real estate impact of COVID-19. With hotels, the rent roll changes over night, and occupancy came to an abrupt halt about the time the coronavirus was labeled as a pandemic in the second week of March.

Retail properties are facing a slightly different problem, with many tenants having been forced to close by government orders and, in turn, either refuse to pay rent or are unable to.

By some accounts, upwards of 50% of national tenants have stopped paying rent — names like Dick’s Sporting Goods, Burlington, Barnes & Noble, Old Navy and Nordstrom have been listed as not paying at all locations.

Many owners with a cash flow shortfall are turning to their lender to find a solution that delays the impact a few months. For owners with commercial mortgage-backed securities loans, the lending source is so complicated not much help is offered.

The first call for CMBS borrowers is to the master servicer.

The problem is the master servicer can’t do anything to modify the loan documents. They can potentially move reserves around to try to provide short term help, but any substantive help can only come after the loan is transferred to the special servicer.

Complicating the matter is that when a loan gets transferred to special servicing, it triggers fees and report costs that end up burdening the borrower more.

This cumbersome process is totally ineffective against the problems the pandemic has brought on.

A recent search of Trepp’s database for the Richmond region turned up a handful of loans added to the watchlist to be potentially transferred to a special servicer.

But many fear that while April is the early indicator, the true tests will come in May and June.

John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@jblevyco.com.

View the article here.