Retail, hotel borrowers skip mortgage payments: Trepp
The coronavirus outbreak is already causing a spike in commercial mortgage delinquencies in the hotel and retail sectors, a new analysis finds.
The data speaks to a bigger fear haunting the commercial real estate industry: That Covid-19 could spark an even bigger mortgage crisis than the one in 2008, which devastated American homeowners.
Commercial mortgage-backed securities, or “CMBS,” are vehicles that take the loans for properties such as apartment buildings, hotels, office buildings and shopping malls and package them into one investment product. CMBS loans account for about 15% to 20% of all commercial real estate mortgages today. Other lenders include insurance providers and banks.
Hotel lodging was among the first industries to start to feel the pain of restrictions from coronavirus. Even before state governments began imposing stay-at-home orders, businesses curtailed travel. And large gatherings like conventions and concerts were canceled.
Nearly 20% of all lodging CMBS loans are categorized as either “in grace period” or “beyond grace period,” according to data from Trepp, a New York-based research firm that tracks the CMBS market. That’s up from about 1.5% of such loans in March.
Many of these payments would have been due by April 10, and still could be made. However, if this percentage sticks for the rest of the month, the dollar amount of these loans not paid on could reach $15 billion for the U.S. hotel sector, Trepp said.
Retail CMBS loans not paid on in April have jumped to about 9% from 1.7% in March, Trepp said. If this percentage holds into May, the dollar amount of impacted retail loans could surpass $10 billion, the researcher said.
The spike in late payments is an early indicator for just how bad things could get for retail and lodging real estate, according to Trepp. The numbers show a more than 10-times jump in hotel borrowers, so far, not paying their on loans in April, and about a five-times jump for retail, Trepp senior managing director Manus Clancy said.
“For a lot of these … what we see accompanying these is a lot of notes saying, ‘We want a forbearance. We cannot pay this,'” he said. “Unfortunately, the numbers above could be on the low side of what’s to come. … There are many examples of loans for which the April 1 payment was made, but for which the watchlist comments now indicate a forbearance has been requested.”
Northridge Mall in Salinas, California, for example, made its April payment on its $79 million loan. But the loan servicer has asked for relief because of Covid-19, Clancy said.
West Lancaster Plaza in Lancaster, California, which is sitting on a $10.1 million loan, is currently in a grace period for April, meaning its April payment has not been received. The servicer of the loan has said: “This loan is being monitored for hardship.” And the borrower has asked for a three-month forbearance on monthly payments, Trepp said.
Some bigger names in real estate are already speaking out on the issue, too.
“The market for commercial real estate mortgage loans in the United States stands on the brink of collapse,” real estate investment firm Colony Capital CEO Tom Barrack said in a Medium post late last month.
“If these institutions are not permitted to maintain the flexibility and patience needed to undertake the loan restructuring efforts that will be critical to weathering the Covid-19 crisis, loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees.”
Meantime, billionaire investor Carl Icahn told CNBC last month he was shorting the commercial mortgage bond market, anticipating a wave of defaults.