The Steely Dan rock group probably didn’t talk about CREs in their 1975 hit Black Friday, which talks of an unspecified financial crisis. Yet there’s a feeling of foreboding in today’s CRE landscape that is hard to overlook.
Commercial real estate is one of the sectors most impacted by the coronavirus, according to a new study by Moody’s Analytics.
Although reported delinquencies for commercial mortgage-backed assets are clear, the effect on banks and life insurance firms is less known.
The July Investment Bulletin of the American Council of Life Insurers—cited in Moody’s report—said that though delinquencies remained minimal, pandemic-related shifts accounted for over 3 percent of the overall portfolios of insurance firm’s’ commercial property loans.
The tale is very close on the banking side. Although there has been an overall climb — nearly 60 percent—in commercial and multi-family real-estate loans that have gone non-accrual while the recession went on, the real problem is the underlying amount of loans that have earned forbearance in the expectation that the recession will end in a short time.
What does the environment of banking look like if banks and life insurance firms suffer delinquencies to the same degree as commercial mortgage lenders? In one word, terrible.
Approximately 25% of CMBS loans backed by hotel properties in the nation’s top 50 metropolitan statistical areas were overdue at the end of September, according to data from Trepp LLC, the leading provider of data and analytics for the commercial real estate industry.
For example, 66.56% of hotel loan balances in the Portland, Ore. region were delinquents. It was 48.80 percent in Nashville, Tenn.
In the Richmond area, 27.01 percent of hotel credit balances were overdue.
Using the same data for commercial mortgage-backed securities loans backed by retail assets, the average rate of delinquency in the top 50 regions is 13.66%.
The worst sector is Minneapolis, where 67.28 percent of retail loan balances are overdue owing in no small part to the Mall of America and its $1.4 billion loan balance is overdue.
The Hampton Roads market is in the top 10 with a 27.65 percent delinquency rate.
The Richmond area is faring much better. It is ranked 37th with 5.17 percent of retail commercial mortgage-backed loan balances overdue.
Hotel and retail assets are experiencing the most pain at the moment, but commercial real estate has not seen the burden that a prolonged decline could bring.
Moody’s points out precisely that while multi-family loans are generally considered to be less risky than other forms of commercial real estate loans, history does not support that conclusion. In two of the last three recessions, multi-family non-acrual rates were either on par or marginally higher than other commercial real estate loans at the height of credit stress.
Indeed, amid Fannie Mae and Freddie Mac’s sub-3% pricing of loans, the two government-controlled mortgage firms are focused on delinquency data like never before.
September is really the first month of rent tension, as the economy struggles to get back to pre-COVID levels with the specter of a cold-weather infection looming,
But the financial crisis of Black Friday did not come yet.