US CMBS Collateral Showing Early Signs of Improvement
After several years of declining loan performance, the rate of deterioration appears to be slowing for U.S. commercial mortgage-backed securities (CMBS) collateral, according to Standard & Poor’s.
Although performance varies by property type, market, and vintage year, we’ve been seeing more instances of improving property operating cash flows. We believe that a recovering commercial real estate sector and increased liquidity are providing the underpinnings for better collateral performance and credit metrics.
In the first quarter, the average loss severity rate fell below 40% after five consecutive quarters of 50% and higher rates. Additionally, CMBS delinquencies saw their smallest quarterly increase (2.6%) since 2007 in the first quarter of this year.
The improving landscape doesn’t appear to have yet spilled over to the retail sector, which still has stubbornly high loss severity rates and the longest resolution times of the major property types. Contributing to the high rate were bankrupt retail tenant stores that were liquidated at above-average loss severity rates.
The CMBS loss severity rate dropped to 37% in the first quarter after hovering in the 50%-60% range in 2009 and in all four quarters of 2010 (see chart 1). One quarter doesn’t make a trend, but we believe that the following positive events may be laying the groundwork for lower loss severity rates in the future:
- Improving property fundamentals;
- Expanding debt issuance;
- Speedier loan resolutions, which limit the amount of servicer advance buildup; and
- Collateral cash flows, which we expect to continue moving in a positive direction, and provide support for higher property valuations and sales prices.
We believe, however, that loss severity rates will remain at fairly high levels—north of 40%—in 2011 and not start to show any meaningful improvement until later in 2012. In 2012, it is our view that property fundamentals will strengthen further, and overall collateral performance across each sector will gain positive momentum. As a result, we expect loss severity rates may start to show a more steady decline.
For details see: CMBS Quarterly Insights: Loss Severity Rates Drop As U.S. CMBS Collateral Performance Shows Early Signs Of Improvement and CMBS Quarterly Insights: A Ceiling For U.S. CMBS Delinquencies May Be Forming
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