In the early stages of the COVID-19 pandemic shutdown, there was a lot of optimism that the aggressive action taken by the federal government in the $1.8 trillion CARES Act would help avoid a tsunami of personal and business defaults.
The Small Business Administration was given $350 billion to fund loans to small and medium sized businesses and the Federal Reserve allocated $454 billion for loans, loan guarantees and investment to support eligible businesses, states and municipalities. The hope was that the infusion of capital through the CARES Act would allow businesses to pay their employees and maintain their overhead— including mortgage obligations—for what was anticipated to be a short national shutdown.
But the shutdown was not as short as expected and as the health crisis persists, commercial property owners are running out of options to cope with the rapidly growing income loss. The natural consequence is an increase in distressed assets. The industries most immediately impacted were hospitality and retail and the potential magnitude of the distress in the commercial real estate sector became apparent. In the two months between March and May, the percent of hotel mortgages sent to special servicing jumped from 2.27% to 16.21%. By September, that rate jumped to 26.04%. Retail mortgages sent to special servicing grew from 5.31% in March to 18.32% in September. According to Real Capital Analytics, these two sectors represented 92% of the new troubled assets in the second quarter. According to Trepp, the large drop in the delinquency rates for hotel and retail assets reflected in October’s report comes as the result of the high number of forbearances being granted and borrowers being authorized to use reserves to bring debt service payments current. Those actions helped push the overall CMBS delinquency rate down 64 basis points from September to 8.28% in October.
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GARY BARAGONA
Director of Research
415.229.8925
gary.baragona@kidder.com
Written by John Fioramonti
Kidder Mathews Research