As many real estate and REIT watchers have realized, the recovery trend in commercial real estate continues and bodes well for all CRE sectors, but has been especially pronounced in multi-family.
Even as the delinquency rate on legacy CMBS loans hits new highs, commercial real estate's drag on the nation's banking system continues to ease. Chandan's independent analysis of first quarter call report data shows the default rate on banks' commercial real estate and multifamily mortgages fell to 3.45 percent, the lowest level since mid-year 2009. Bolstered by rapidly improving fundamentals and a relative abundance of low-cost financing, the apartment default rate dropped to 2.36 percent, half its peak level. The default rate on commercial property loans is declining at a slower pace, reflecting the mixed recovery in cash flow and value trends in the office, retail, and industrial sectors. Among the highlights are:
- A clear majority of significant multifamily lenders reported lower default rates in the first quarter. Across this group, the median decline in the multifamily default rate was 80 basis points. For banks reporting lower commercial property default rates, the median decline was 50 basis points.
- Banks' non-performing commercial and multifamily balances fell to $54.3 billion in the first quarter, down 27.1 percent from the peak level of distress. Multifamily distress has fallen by almost half from its high-water mark.
- Net commercial property lending fell $3.1 billion during the first quarter while multifamily lending increased by $2.4 billion. Banks with lower default rates on legacy loans drove new financing. The median default rate was 0.8 percent at banks that increased their multifamily lending and 1.6 percent at banks that cut their exposure.
This bank level data comes on the heels of CMBS date that doesn't look encouraging, but has largely been driven by large property events. According to RBS:
The delinquency rate increased slightly to 9.5% in May for the conduit universe (including new CMBS 3.0 issue). The delinquency rate on legacy conduit deals increased to new high (10.5%) this month due to: unsuccessful modification negotiations on Two California Plaza ($470MM), the re-default of the previously modified Bethany Portfolio ($297MM), the maturity default of the A-3 tranche of the $237MM Hines Portfolio, and $525MM in recently modified loans (awaiting transfer back to the Master) being reported as 30 days DQ. Liquidation volume was even with last month at $1.3bn, while loss severity increased to 55%. The increase in loss severity was driven by 2 large retail property liquidations: Valley View Center ($125MM; 84% severity) and Greeley Mall ($41MM; 96% loss severity).
May remittance data show 132 loans, totaling $1.3bn, were liquidated at an average loss severity of 55% (excluding loans with loss severity less than 2%), up from last month's 46% loss severity. The volume of liquidations was even with last month.
One must also realize that the percent delinquent is the percent on a shrinking outstanding portfolio, which might mistakenly magnify the problems.
The majority of the CMBS problems are taking place, unsurprisingly, in the 2006/2007 vintages. The data supports the multifamily performance as loss severity was significantly lower than other sectors.
The combination of bank and CMBS data support the contention that commercial real estate continues to improve and continues to warrant an allocation to investors' portfolios.
Additional disclosure: I am long various REITs across the capital structure as well as CMBS exposure through AGG.This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.