MARKET INSIGHTS
November 9, 2020

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

Marvin Gaye probably wasn’t thinking about 2020 on any of the songs from his 1971 hit album “What’s Going On,” but this year’s events sure would be fertile ground for inspiration.

The past month has provided enough angst for most everyone, including commercial real estate lenders and investors.

One of the biggest discussion points revolves around extending forbearance periods for borrowers who have experienced income loss during the pandemic.

When the pandemic was in its infancy, regulators all agreed that pandemic-related modifications by banks, credit unions and savings and loans would not have to be marked as troubled debt modifications for up to six months.

Similar flexibility was given to insurers so that they could help needy borrowers manage through.

No one knew how long this would last. Now that we have entered the eighth month of uncertainty, lenders and regulators alike are struggling with guidance on if or how to continue forbearance.

Of course, the latitude given to borrowers with bank and insurance company loans has not been extended to borrowers of commercial mortgage-backed securities for the most part. Those loans are sold into trusts that are bound by multiple rules that make it difficult and costly to modify them efficiently.
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Eight months into the pandemic, the scorecard for delinquent loans is telling. Loans backed by industrial, multifamily and office properties have been largely unaffected, according to data from Trepp LLC, a leading provider of data and analytics to the commercial real estate industry.

In fact, delinquency rates for commercial mortgage-backed securities loans backed by industrial and office properties were lower in October 2020 than in October 2019. Delinquencies for multifamily commercial mortgage-backed securities loans are up slightly and stand at 2.95% compared to 2.07% 12 months ago.

The highest delinquencies by far are on loans backed by hotel and retail properties.

The delinquency for all commercial mortgage-backed securities loans peaked at 10.32% in June and now is at 8.28%. The highest delinquency of all time was 10.34% in July 2012 and that was broad based, which highlights that acute pain for retail and hotel investors.

On a positive note, delinquencies for both hotel and retail backed loans are improving.

The anxiety has led to an increasing number of lenders who are selling their loans. According to Commercial Mortgage Alert, offerings have hit the market in recent weeks where banks, investment banks and insurance companies are selling performing — as in current — loans backed by a variety of properties.

Deutsche Bank, Morgan Stanley, Wells Fargo and Allstate have recently gone to the market with packages of loans. Many of the packages are made up of loans backed by hotels and retail properties but there are mixes of loans backed by office and multifamily properties as well.

With current rates at all-time lows, it is a good time to be a borrower with a loan that is lower leverage and backed by an office, industrial or multifamily property.

Insurance companies have had trouble getting the same volume of loans as in 2019. But rates are at a point where the lender won’t price below, which for many is 3%.

Loans backed by multifamily properties are still sought after and pricing in the mid to high 2% range depending on leverage.

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

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