“Compared to previous months, CRED iQ observed an increase in CMBS loans with distressed maturity balloons in August 2022,” wrote Marc McDevitt, senior managing director at CRED iQ.
“As of August 2022, there were approximately $4.7 billion in outstanding loans that were classified as non-performing. This number excludes debt with properties that are in foreclosure and assets owned by real estate (REO), but may include loans that went into special care ahead of their scheduled maturity dates.
“Almost all loans (99 percent) that were identified as non-performing defaults have already been transferred to special care. Many loans, about 36 percent of the total outstanding balance, defaulted before maturity, prompting referrals to special services.
“However, maturity concerns were the primary reason for special service transfers for most defaulted maturity loans. On balance, around 19 percent of the loans were transferred to the special service due to a default in maturity and a further 20 percent of the loans were transferred to the special service due to an imminent default in maturity.
“Overall, the total outstanding debt for distressed term balloons was 35 percent higher than in July 2022, when the total was approximately $3.5 billion. The increase comes amid a rising interest rate environment that is making the refinancing process difficult. If the underlying collateral is also experiencing cash flow issues, longer run-offs may be required.
“Additionally, notably, the increase in delinquency coincides with a higher volume of maturing loans. In December 2021, CRED iQ released a report looking at planned maturities in 2022 and on a monthly basis, July 2022 had the third highest amount of planned maturities at $2.3 billion. This came a month before the rise in non-performing loans in August.
“Scheduled maturities for the remainder of 2022 are concentrated in October and December, creating opportunities for defaults that continue to materialize at a relatively high rate.
“Our observations included loans securitized in both single-asset, single-bonrower and conduit securitisations. Maturity defaults were split equally between both types of securitisations based on the outstanding balance.
“Further research shows that the amount of defaults within the conduit subset has remained fairly flat over the past three months, ranging from $2.3 billion to $2.5 billion. This suggests that the recent surge in August was due to securitization loans involving individual assets and borrowers.
“The amount of outstanding debt securitized in single-asset, single-borrower transactions increased by approximately $1.3 billion net in August.
“One such example was the $465 million Greenway Plaza loan, which was securitized in a single-asset securitization from a single borrower in 2017. The loan is secured by a 4.2 million square foot 20-building office park in Houston.
“The Greenway Plaza loan was placed into special administration in July 2022 after a default in May 2022. A forbearance agreement expired in July, returning the loan’s status to non-performing.
“Maturity defaults can also severely affect conduit securitisations in the form of adverse selection. Take securitization UBSBB 2012-C2, for example, which as of September 2022 still had eight specially managed assets, including three REO assets. The remaining five loans have all defaulted on maturity, leaving all outstanding debt in the securitization in the hands of dedicated servicing workouts.
“By property type, loans secured by retail and lodging account for the highest percentage of non-performing loans due. If we limit our perspective to just CMBS conduit securitisations, retail loans accounted for about 67 percent of all non-performing loans due, while loans secured by residential real estate accounted for 20 percent.
“The high concentration of retail loans consists mainly of regional collateral in shopping centers. The Cumberland Mall in Vineland, NJ and the Greenwood Mall in Bowling Green, Kentucky are two of the more recent examples of regional malls securing loans that have defaulted on maturity in the past month.”
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