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The delinquency rate for commercial mortgage-backed securities climbed higher in March, led by the lodging and office sectors.
The share of CMBS loans that have been more than 30 days delinquent rose by 41 basis points to 7.55 percent in March from February, and 90 basis points year over year, according to a report by research firm Trepp. The period reverses February’s month-over-month decline.
The percentage of loans that are seriously delinquent, a measure that includes loans that are more than 60 days overdue or are in foreclosure, increased 40 basis points month over month to 7.29 percent.
Additionally, a greater share of the delinquent CMBS loans are non-performing matured balloon loans, meaning that they have hit a payment default at maturity — adding to a rising trend in recent years, according to Stephen Buschbom, head of Trepp’s applied research and analytics team. These loans have been bouncing back and forth between performing and non-performing loans from month to month, as borrowers and their special servicers try to negotiate what to do, such as modifying terms, extending the loan or having the borrower turn over the keys.
“Since the Fed hiked rates and we reached the peak Fed funds rate, that increase in interest rates is when we saw the maturity defaults really ramp up between 2023, 2024,” said Buschbom. “I’m hoping to see us plateau here so that 2027 and beyond we’ll start seeing the delinquency rates trend downward.”
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The office sector had the highest share of delinquent CMBS loans among the property types Trepp analyzed. Its 11.71 percent rate was up 51 basis points month over month but below January’s recent high of 12.34 percent.
In general, the office market has been struggling for some time. But tenant lease expirations are posing another hurdle for the sector, according to Buschbom. Lenders may be less willing to underwrite properties with heavy lease rolls expiring in the near term, when in the past, they might be more amenable to structuring deals around the risk.
“That really puts the borrower in limbo,” he said.
Meanwhile, the sector that saw its share of delinquent loans grow the most was hotels, which saw its share grow by 137 basis points in March from February to hit 7.31 percent — the first time this percentage has been above 7 percent in nearly a year.
However, the lodging sector’s rise is mostly because of a large loan tied to a Hilton San Francisco hotel portfolio that fell into delinquency in March, Buschbom said.
“That wasn’t really a surprise,” he said. “It was already in special servicing and known to be a problem loan.”
As for multifamily, the sector’s share of delinquent CMBS loans grew by 30 basis points month over month to 7.15 percent, which was almost two percentage points higher than its share a year ago.