CMBS Market: More Stable Than You'd Think, But Still Volatile In First Half Of 2021

The commercial mortgage-backed securities market has a volatile six months ahead as ongoing uncertainty around vaccine distribution and government stimulus efforts mitigate optimism. But by year's end, the market collateralized by commercial real estate could reach a more stable equilibrium, Fitch Ratings says in a new report. 

"There are a lot of moving pieces that we have to monitor over this first half because none of it is clear at this point," said Fitch CMBS Senior Director Melissa Che, one of the authors of the report.

The new Biden administration has yet to deliver on an anticipated third round of stimulus funding, and hotel and retail properties tied to CMBS remain at reduced capacity levels with social distancing measures still in effect, nullifying a greater CMBS recovery by limiting borrowers' ability to repay their loans, according to Che.

"How quickly we can get the population vaccinated could mean how quickly we reopen," Che said. "We assume we are going to be in a better place by midyear. The expectation is [by then] there will be some recovery in the hotel sector, and it should gain back some traction."

CMBS has been unstable during the coronavirus pandemic but performing better than initially expected. Fitch originally thought the U.S. CMBS delinquency rate — a measure of CRE loans tied to collateralized securities that are late in payments — could reach as high as 8.75% in 2020, but borrowers, debtors and servicers worked together and used modifications, forbearances and government stimulus to keep the delinquency rate no higher than the 5% peak reached in July, according to the report. At year-end 2020, the overall CMBS delinquency rate stood at 4.69%, compared to 1.31% pre-pandemic in March 2020, Fitch said. 

Were it not for fiscal stimulus and the debt relief granted, the overall delinquency rate would be at 8.7% today, and the hotel and retail delinquency rates would hover at 41% and 17%, respectively, Che said in the report. 

Fitch predicts the delinquency rate will improve over this year, falling below 4% by the end of 2021. Fitch doesn't anticipate a deeper reduction in the overall delinquency rate until 2022. 

One of the hardest-hit CMBS asset classes, hotels, is expected to see its revenue per available room recover to 73% of 2019 levels this year, with much of that improvement expected to occur in the second half of 2021, Che said. The hotel industry will not reach true 2019 RevPAR levels again until 2025, and she expects new hotel loan originations will remain muted this year. 

She doesn't believe there will be a slew of fire sales in the hard-hit hotel and retail CRE segments like first projected when the pandemic hit. 

Early on, analysts predicted hotels and retail, in particular, would land in distress, leading to deals and deep discounts in the market for investors.

"I don't think there are going to be fire sales across the board," Che said. "I think stimulus has played a big role, and servicers have played a big role in terms of granting short-term debt relief. We know this health crisis is different from the prior great financial recession. It's a medical health care crisis, and servicers have done a great job quickly addressing the short-term debt relief needs. I don't think servicers wanted to foreclose on everything because we are in a very unique situation right now."

Che expects new CMBS issuance to remain somewhat stifled in 2021, with hotel and retail issuance limited. Much of the new CMBS loan issuance coming into the market is made up of sanitized pools of office, self-storage and industrial loans, Fitch said.