Local CMBS delinquencies down, if only for a month
(Crain's) — The delinquency rate for securitized commercial mortgages in the Chicago area dipped last month, but bad loans are expected to keep piling up as more landlords struggle with rising vacancies and falling rents.
The percentage of past-due local CMBS loans fell to 7.5% in June, down from 7.7% in May but more than double the 3.2% in June 2009, according to Trepp LLC, a New York-based research firm.
The Chicago area's delinquency rate was lower than the national rate of 8.6%.
Local delinquencies are likely to resume their rise as more borrowers struggle to refinance maturing loans or fall behind on monthly mortgage payments because of a loss of tenants, falling rents, or some combination of the two. Trepp Vice-president Paul Mancuso predicts the delinquency rate for CMBS, or commercial mortgage-backed securities, loans on local properties will peak in the first half of 2011.
Hotels remain the biggest trouble spot by far, with a 19.2% delinquency rate in June vs. 3.5% a year earlier.
"The sector has been negatively impacted by the 'double whammy' pullback from both business and leisure travelers," Mr. Mancuso writes in an e-mail. "As a result, unlike office and retail that have long-term lease expirations, property owners have struggled on a nightly basis throughout the economic crisis with declining room rates and occupancy levels."
Trepp's data covers local loans bundled and sold to investors as bonds, or CMBS, not loans held by banks. CMBS lenders were some of the most aggressive real estate financiers during the boom, and the sector has been slow to come back since the credit crisis, one reason many landlords have had a hard time finding new loans to refinance their properties.
The problems are greatest among loans made from 2005 to 2007, Mr. Mancuso says.
"Those were really the loans that were classified by lax underwriting and inflated property values," he says.
Trepp calculates its delinquency rate by dividing the volume of local CMBS loans 30 or more days past due by the total balance of all CMBS loans in the Chicago area.
Delinquency often leads to foreclosure: CMBS loan servicers, for example, have filed to foreclose on the Hotel Burnham in the Loop and the Allerton Hotel on North Michigan Avenue.
But Mr. Mancuso says more servicers are modifying loans to allow delinquent borrowers to hang onto their properties. Unable to make its monthly loan payment, the owner of the Amalfi Hotel in River North was able to negotiate a one-percentage-point reduction, to 5.51%, on the interest rate on a $37-million CMBS loan and push back the due date to December 2014 from August 2012, according to a recent loan report.
An executive at Cornerstone Real Estate Advisers LLC, the adviser to investors that own the hotel, did not return a call for comment.
Local CMBS loans to industrial properties had the second-highest delinquency rate, 8.8%, followed by retail, at 7.8%; office, 6.0%, and apartments, 3.7%. The question is what happens to the industrial, retail and office loans when leases expire and the space either goes vacant or gets re-leased at a much lower rent, reducing the properties' cash flow.
"That's where the potential exists for trouble in some of those property types," Mr. Mancuso says.
