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Delinquency Rate

Step-by-Step Guide to Understanding CMBS Delinquency Rate in Commercial Real Estate (CRE)

Last Updated May 17, 2024

How to Calculate Delinquency Rate

In the commercial real estate (CRE) market, the delinquency rate measures the percentage of borrowers that missed payment obligations.

Generally speaking, the delinquency rates serve as a reliable proxy for understanding the current conditions of the real estate market, which is closely tied to the state of the macroeconomy.

Therefore, a sudden rise in delinquencies is a valid cause for concern among industry practitioners, even among those without a vested interest in the real estate sector.

In simple terms, the CMBS delinquency rate estimates the total balance of CMBS loans that are overdue.

To calculate the delinquency rate, there are two pieces of information necessary:

1. Balance of Delinquent Loans
2. Balance of Total Loans Outstanding

With that said, the steps to calculate the delinquency rate are as follows:

• Step 1 ➝ Calculate the Balance of Delinquent Loans
• Step 2 ➝ Calculate the Total Balance of Loans Outstanding
• Step 3 ➝ Divide the Delinquent Balance by the Total Loan Balance
• Step 4 ➝ Multiply by 100 to Convert the Delinquency Rate into Percentage Form

Delinquency Rate Formula

The delinquency rate on CMBS loans is calculated by dividing the delinquent loan balance by the total outstanding CMBS balance.

Delinquency Rate (%) = Delinquent Loan Balance ÷ Total Outstanding Loan Balance

Where:

• Delinquent Loan Balance ➝ The balance of loans that have missed a payment deadline.
• Total Outstanding Loan Balance ➝ The total balance of all outstanding loans.

Conversely, the delinquency rate can be determined using the number of delinquent loans and total outstanding loans.

Delinquency Rate (%) = Delinquent Loans ÷ Total Outstanding Loans

Where:

• Delinquent Loans ➝ The number of loans where the borrower has missed a payment deadline.
• Total Outstanding Loans➝ The total number of all outstanding loans in a portfolio or on a macro-level.

How Do CMBS Delinquencies Work?

Commercial mortgage backed securities (CMBS) are collateralized loans by a collection of commercial mortgages, and the underlying properties.

The risk profile of the properties tied to a CMBS loan can carry a wide variance, as the property types can range from office buildings to shopping centers.

The process of a CMBS collapsing into delinquency is conceptually comparable to any sort of default on a loan or debt security — but there is a distinction between the delinquency rate and default rate.

• Delinquency Rate ➝ The borrower is behind schedule and might have missed a payment but can potentially recover (and avoid property foreclosure).
• Default Rate ➝ The borrower has missed mandatory payments and is unable to meet a mandatory payment obligation owed to the lender on time, causing foreclosure to soon ensue.

CMBS delinquencies are more complicated than a default on a traditional commercial loan because there tends to be more moving pieces and stakeholders involved.

The lenders incur a monetary loss, or at least are placed at risk, but the other stakeholders, namely the investors in the CMBS, are impacted too.

In the worst case scenario, the failure to meet the payment deadline in a timely manner coincides with the inevitable foreclosure of the underlying property, causing stakeholders to incur steep monetary losses.

The distributable proceeds are often not enough for all stakeholders to be made-whole from the failure to recoup the loan’s entire value. But the risk-return trade-off is understood by most investors beforehand (i.e. the potential upside must have been deemed worth undertaking the risk).

• Diversification ➝ The appeal of CMBS loans is the diversification of the risk, wherein the risk is “spread” across several loans (and each investor can decide where to put their capital based on their risk-return profile).
• Pecking Order ➝ The drawback to the CMBS loan structure, however, is that delinquencies can have broad implications and cause several stakeholders to sustain losses, albeit certain investors are more protected than others (i.e. senior tranche).

CMBS Delinquency Rate by Sector

The delinquency rates for office and industrial property CMBS loans surged during the COVID-19 pandemic as offices shifted to remote work (or hybrid model), while industrial facilities grappled with supply chain disruptions.

In short, the higher interest rate environment, an uncertain economic outlook, and shift toward remote work placed substantial pressure on the office sector.

The Fed’s decision to raise interest rates, or the cost of borrowing, made matters worse, as the entire commercial real estate (CRE) sector faced headwinds — illustrating the influence that macro risk and external events can have on these sorts of complex financial securities.

General Rules of Thumb:

• Industrial ➝ The industrial sector has historically demonstrated resilience, with one of the core drivers being the growth in e-commerce, creating more demand for warehouse and distribution facilities.
• Hospitality and Lodging ➝ The hospitality and lodging sector has experienced significant volatility and is influenced by travel restrictions and shifts in consumer behavior resulting from unforeseeable events like the COVID-19 pandemic.
• Multifamily ➝ The multifamily sector remains relatively stable, namely because a home and housing properties are necessities rather than a discretionary asset.
• Office ➝ The office sector encounters obstacles due to shifting work patterns in the modern workplace, most notably the normalization of remote work.
• Retail ➝ The retail sector has been severely compressed in recent times, particularly shopping malls and physical stores, as a result of the surge in online shopping and evolving consumer preferences, although the trend has started to recover in a favorable direction.

CMBS Loan Delinquency Rate Data (Source: Moody’s Analytics)

CMBS Delinquency Status Terms

Term Definition
Current
• The loan status indicating that all payment obligations to date have been met, and the borrower has issued on owed payments within the agreed upon time frame.
• The grace period is the time wherein a borrower can make a late payment in-full without triggering a penalty (<30 days)
30 Days Delinquent
• The loan receives a status of 30 days delinquent when the payment is overdue by 30 days — therefore, the borrower missed one payment cycle but has not exceeded 30 days past the due date.
60 Days Delinquent
• The loan status of 60 days delinquent applies when a loan payment is overdue by 60 days, reflecting that the borrower has missed two consecutive payment cycles.
90 Days Delinquent
• The loan receives a status of 90 days delinquent when a payment is overdue by 90 days, which marks a critical point, as it indicates the borrower has missed three consecutive payment cycles (and often precedes more severe consequences).
Performing
• The loan status that indicates the borrower is making regular payments as agreed in the loan terms, and the loan is considered ‘healthy’ from a lender’s perspective.
Matured
• The status of a loan when the borrowing term has come to an end. For balloon loans, the date of maturity refers to the point at which the final lump sum payment is due.
Balloon
• The balloon loan structure refers to a type of loan repayment schedule comprised of periodic payments for most of the borrowing term, followed by one large payment (“lump sum”) for the remainder of the principal at the end of the term.
Non-Performing Matured Balloon
• The non-performing matured balloon loan is a balloon loan that has either reached or passed its maturity date, without the borrower making the final payment to close out the borrowing arrangement (i.e. defaulting on the loan).
Foreclosure
• The foreclosure of a property is a legal process by which a lender attempts to recover the initial investment from a borrower (post-default) that is unable to or stopped issuing payments by forcing the sale of the asset used as collateral to satisfy the debt.
REO (Real Estate Owned)
• REO describes a class of property owned by a lender—most often a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction, after which the lender becomes the owner of the property (and strives to sell it on the open markets).
What is CMBS 2.0+?

CMBS 2.0+ refers to the CMBS issuances post-2008 financial crisis, in which a series of improvements and reforms were implemented to restore investor confidence.

The enhancements adhere to the Dodd-Frank Act with a higher standard for underwriting, including disclosure requirements and more robust rules to mitigate risk.

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CMBS Delinquency by Property Type

The commercial mortgage-backed securities (CMBS) market has been facing a rise in delinquency rates since the COVID-19 pandemic, particularly in the office sector.

The CMBS delinquency rate is of particular importance in commercial real estate (CRE), considering the composition of CMBS relative to the total financing in the CRE market.

The office sector has faced significant challenges, primarily due to declining demand from corporate tenants adjusting their reliance on in-person work, which has been a trend led by the major tech companies that favor remote work.

The reduced demand has led to an excess of available office space for lease, with sublease space reaching or nearing record highs in numerous markets.

In response, many companies actively downsized their office footprints by allowing leases to expire or opting for smaller-sized spaces post-renewal.

“Office CMBS Payoffs Increased to Start 2024 as \$1.15B Came Due” (Source: Commercial Observer)

In the past six months ending March 2024, banks and institutional lenders have tightened loan spreads—or “risk premiums”—across various CRE sectors, according a survey conducted by Trepp.

CMBS Delinquency by Property Type (Source: Trepp)

CMBS Delinquency Rates: 2024 Market Data Research

The CMBS delinquency rate dropped marginally in March 2024, per research conducted by Trepp.

The delinquency rate for US CMBS dropped to 4.67%, a decline of four basis points from the prior month.

For a benchmark for comparability, the peak amid COVID-19 was 10.32% in June 2020.

The reduction was attributable to the ongoing improvement in the retail sector, marking its fourth consecutive monthly decrease.

The delinquency rate in the retail sector decreased by 47 basis points, reaching 5.56%.

Notably, the office sector, along with one other sector, saw a decrease in the delinquency rate, which fell by 5 basis points to 6.58%.

CMBS Delinquency Rates by Major Property Type (Source: Trepp)

Retail CMBS Loan Delinquency: Market Trends

Retail CMBS loan delinquency peaked at 17.63% in June 2020, up from 3.60% in March 2020. Among property types, only lodging exceeded that hurdle rate, reaching 22.80%.

According to Trepp, delinquency rates have decreased significantly across asset types but remain above pre-COVID levels. Retail loans in the securitized market have shown relatively strong performance compared to other assets.

In March 2024, the overall CMBS delinquency rate fell by four basis points to 4.67%.

The retail sector led this decline, dropping by 47 basis points to 5.56%. Despite the stable outstanding balance of retail loans, indicating resilience in issuance, performance has softened.

CMBS Retail Distress (Source: Trepp)

Delinquency Rate Calculator

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CMBS Delinquency Rate Calculation Example

Suppose a commercial real estate lender is tasked with analyzing the delinquency rate of a CMBS portfolio comprised of a total of 280 loans.

Of the 280 loans, 11 of them are deemed delinquent (past >30 days).

For illustrative purposes, we’ll assume uniform pricing, where each loan per tranche is equivalent, which of course is an unrealistic assumption.

CMBS Portfolio Total Loans (\$) Total Loans Delinquent Loans Average Loan (\$)
Industrial \$600 million 50 2 \$12 million
Lodging \$400 million 40 1 \$10 million
Multifamily \$800 million 100 2 \$8 million
Office \$500 million 50 4 \$10 million
Retail \$300 million 40 2 \$8 million
Overall \$2,600 million 280 11 \$48 million

Given the assumption that the size of each loan per tranche is the same, we can determine the average loan size by dividing the total loan amount by the total number of outstanding loans.

Once determined, we can multiply the average loan size by the delinquency rate to quantify the size of the delinquent loans in monetary terms.

For each tranche, we’ll calculate the delinquency rate per sector:

• Industrial = (\$12 million × 2) ÷ \$600 million = 4.0%
• Lodging = (\$10 million × 1) ÷ \$400 million = 2.5%
• Multifamily = (\$8 million × 2) ÷ \$800 million= 2.0%
• Office = (\$10 million × 4) ÷ \$500 million = 8.0%
• Retail = (\$8 million × 2) ÷ \$300 million = 5.0%

Combined, the overall delinquency rate comes out to 1.8%, which reflects the proportion of loans across all categories that were not repaid on time and now at risk of default.

• Overall Delinquency Rate = (\$48 million × 11) ÷ \$2.6 billion = 1.8%