Monthly Snapshot: How the CRE, CMBS, CLO, and Banking Markets Performed in August

In our last months' update, we had mentioned that the US saw an upswing in hiring in July despite the fears of the Delta variant. The trend did not last long.

Wall Street Journal reported, 'U.S. hiring slowed sharply in August as the surging Delta variant dented the pace of the economic recovery.' According to the Bureau of Labor Statistics, nonfarm payrolls increased by 235,000 for the month, far lower than the economists' estimates of 720,000 new jobs in the month.

As expected, the employment growth was slowest in the services sector. CNBC reported, 'Leisure and hospitality jobs, which had been the primary driver of overall gains at 350,000 per month for the past six months, stalled in August as the unemployment rate in the industry ticked higher to 9.1%.'

Despite slower job growth, the economy is continuing to grow, albeit at a slower pace due to the high demand for workers. This has resulted in the unemployment rate falling to a pandemic low of 5.2% in August from 5.4% in July.

Unlike market participants' expectations of a scale back in Federal Reserve's bond-buying program based on July's employment report, the jobs report this month could push the tapering until later, possibly out to 2022.

Our monthly snapshothere provides an update on the activity in the CMBS, CLO, and CRE markets and the news that made headlines in August 2021.

What Happened in the CMBS Universe?

The Trepp CMBS delinquency ratedeclined sharply in August 2021, posting the largest drop in six months. The delinquency rate in August was 5.64%, a drop of 47 basis points from the July number.

The August number represented a sizable decline after several months of mostly modest improvements. After two huge jumps in May and June 2020, the rate has now fallen for 14 consecutive months.

In terms of loans in grace period, 2.42% of loans by balance missed their August payment but were less than 30 days delinquent. That was down 51 basis points for the month.

The percentage of loans with the special servicerfell to 7.79% in August from 8.14% in July. For lodging loans, 17.40% were with the special servicer, representing a decline of 55 basis points in August. In the retail segment, 14.18% of loans were in that category - a drop of 48 basis points from July. The percentage of loans on the servicer watchlist climbed to 29.00% in August from 27.56% in July.

Top CMBS Stories

• Hotel Occupancy is Not Cured Yet: U.S. Cities to Watch as Delta Variant Advances- The overall average occupancy for lodging properties is currently 53%, according to Trepp CMBS data - a harrowing sign for those who expected travelers to flock back to hotels as the country reopened. To help navigate cities of interest and how hotels in those areas are performing, Trepp used Trip Advisors 'Travelers' Choice - 2021 Best of the Best' to determine the most highly sought-after cities for travel, analyzed the financial numbers behind the hotels in these locations, and reviewed what Delta cases could mean for the future of those properties.
• Tracking the Influx of Mall Value Reductions (Part 1)- Throughout the coronavirus pandemic and early into the 'post-pandemic' recovery, the retail sector has been one to watch. Mall properties specifically, which struggled as shutdowns commenced and foot traffic declined, have consistently risen to the top of our datasets to watch here at Trepp. Using Trepp data, we have assembled a preliminary list of malls that have seen valuation reductions within the last 3 months. Read for more information on the properties and loans to keep on your radar.
• Industrial Market Snapshot: Promising Signs for Continued Expansion and Growth- The industrial sector is a commercial real estate (CRE) property type that persevered throughout the coronavirus crisis. Now, more than halfway through 2021, the sector continues to show signs of growth, despite recent uncertainty regarding the increase in positive Delta variant and COVID-19 cases. Access the full report.
• Increased Demand for ESG Compliance and Regulation in European Structured Finance- As panelists highlighted on Trepp's recent webinar with European DataWarehouse (EDW), there doesn't appear to be a topic that is drawing the interest and attention of people in terms of both discussion and collaboration in the way that ESG is. Just last month, Trepp wrote about the concerns encapsulated in ESG, sustainability, and green finance and the challenges they may present in the CRE and structured finance industries.

What Happened in the CLO Universe?

Issuance in the CLO market went up slightly in August with a total of 66 deals priced as compared to 62 in the month prior. 35 of these deals were new (31 in the US and four sourced in the EU), 20 resets, 10 refi, and one new.

The number of refi deals went down in August with a total of 10 refi deals, up from 23 refi deals priced in July.

Top CLO Stories

• Elanco Acquires KindredBio; GTT Enters Restructuring- Last week, the CLO team noted restructuring agreements, credit reviews and their impact on companies in the CLO universe, rating actions, and more... Elanco Animal Health Incorporated, a global leader in animal health, announced it has closed the acquisition of Kindred Biosciences. The transaction builds on the existing relationship between Elanco and KindredBio.
• Uber Hit by California Court Decision; MSG Financials Reflect COVID- Last week, Chapter 11 withdrawals and financial restructuring news flooded the headlines. There were economic results announcements from both Golden Nugget LLC and Madison Square Garden Entertainment. On top of this, Uber Technologies' share price was impacted early last week by a California Court decision invalidating a 2020 ballot initiative that allowed the ride-sharing groups to classify workers as independent contractors. So how do these headlines impact the leveraged loan market?
• Syniverse Set to Go Public; Intelsat Requests Chapter 11 Extension- RV Retailer, LLC announced the acquisition of Frost RV in Tucson, Arizona. The acquisition is expected to close this month. RV Retailer is a leading recreational vehicle retail company, which after this acquisition will have 71 RV stores in the United States. The company is represented in the CLO universe by the $140 million RV Retailer LLC - Incremental Term Loan (L+400; due 2028) and the $40 million RV Retailer LLC - Unfunded Commitment (L+400; due 2028).
• Acquisitions; Year-Over-Year Revenue Increases; Executive Team Moves- ASGN Incorporated, one of the leading providers of IT services and solutions, announced the acquisition of Enterprise Resource Perfomance Inc (ERPi). With the acquisition, ASGN adds enhanced solution capabilities in the healthcare industry through ERPIs consulting and data analytics verticals. This is the firm's third acquisition since March when they added IndraSoft Inc and the Infor Business Unit of Avaap.
  

Trepp CRE Research from August 2021

Concerns over economic conditions, the Delta variant, and inflation continue to weigh on commercial real estate market participants. But are there any blind spots that investors should be watching for? In a pivot from assessing recent market events and data trends, The TreppWire Podcast team surveyed CRE participants to gauge market sentiment for the coming months. Between August 13- 21, 2021, we shared our survey with our 20,000+ listeners, clients, and daily TreppTalk readers for their opinions on the near-term future of commercial real estate (CRE) and commercial mortgage-backed securities (CMBS) markets. The upshot of the sentiment: steady but slow improvement with real pockets of risk.

On the topic of the near-term economic outlook, we would say the overall results were modestly optimistic. On the question of 'by the end of 2021, I expect that national economic conditions will have impacted my business…' almost 45% of the respondents were in the positive: that economic conditions would present a tailwind. That was well above the 29% of respondents that said national economic conditions would present a headwind.

The glass-half-full view is that by a plurality, most of those responding to the polls saw conditions being helpful or improving. However, as one Trepp observer noted, a reading of 29% of the respondent concerned about the current near-term economic outlook (and another 8% unsure), the sentiment was far from being universally bullish.

Top CRE Stories

• Episode 99: The Return to Office Change-up: Is a Sell-off in Our Future?- The latest job claims update, higher than expected wage growth, and economic slowdown this summer due to the delta variant have us weighing the possibility of a future sell-off. In this week's episode of The TreppWire Podcast, we dive into the latest change-up in return to office plans and what this means for the office market in various cities, we talk through Labor Day travel numbers and signs of a comeback for the hotel sector and provide an update on recent retail gains. Stay tuned for our 100th episode next week!Listen Now.
• Executive Summary: CRE Sentiment Survey Results; Hopeful Signs & Structural Concerns- Concerns over economic conditions, the Delta variant, and inflation continue to weigh on commercial real estate market participants. But are there any blind spots that investors should be watching for? In a pivot from assessing recent market events and data trends, The TreppWire Podcast team surveyed CRE participants to gauge market sentiment for the coming months. Between August 13- 21, 2021, we shared our survey with our 20,000+ listeners, clients, and daily TreppTalk readers for their opinions on the near-term future of commercial real estate (CRE) and commercial mortgage-backed securities (CMBS) markets. The upshot of the sentiment: steady but slow improvement with real pockets of risk. View the full results.
• Can the CRE Tenant Market Navigate the COVID-19 Turbulence? - For some operators who acquired their assets between 2010-2011 and pre-covid 2020, they have always been able to backfill their vacant spaces at rental rates and terms that are more and more favorable to the operator. Those days are over, at least in the short term, and more than likely, the medium to long term as well. The recent market disruption has caused unprecedented sublease space availability which immediately reduces market rental rates in those markets. Tenants with existing leases that are set to expire are not going to renew at their current contract rental rates. They are going to demand the sublease rental rate, or in most cases even less.
• CDC's Federal Eviction Moratorium Lifted; States Begin Responding- Before the ruling, the renewed moratorium was set to run until October third of this year. Challengers of the policy argued that CDC exceeded their authority, and highlighted how 'if Congress had specifically authorized the action that the CDC has taken' the legality of the moratorium could have been different. To extend the eviction moratorium, the CDC was reliant on §361(a) of the Public Health Service Act.
  

Trepp Banking Research from August 2021

Large banks are leaving more than $16 billion on the table, according to Trepp's analysis of the CCAR/DFAST stress testing results for 2021. There is a wide range in the loss rates determined by the Fed's stress testing models for individual banks, leading us to believe that a significant portion of the variation across institutions is due to differences in data completeness or data quality. In this analysis, Trepp breaks stressed loss estimates into three categories: loan product mix, credit quality, and data quality.

As shown in the chart below, there is a wide range in the CRE loss rates produced by the Fed for each institution.

Some of the differences in loss estimates across institutions can be attributed to differences in the types of commercial real estate loans on banks' balance sheets. Banks with higher proportions of construction and land loans - typically viewed as the riskiest types of real estate lending, especially in a downturn - have higher stressed loss rates, while banks with higher proportions of multifamily mortgage loans - viewed as one of the safer types of commercial real estate - have lower stressed loss rates. By Trepp's estimates, the loan mix accounts for nearly two-thirds of the variation across firms.

What Was Everyone Talking About Last Month?

Banks detect hints of CRE recovery- The bulk of the recent pickup in CRE lending appears to be happening at banks with between $10 billion and $100 billion in assets, said Matt Anderson, managing director at Trepp. Smaller banks that have historically had relatively large concentrations in the sector have been slower to bounce back, he said.(American Banker)

Meet the Long Island guys who love unloved shopping malls - Roughly $3 billion shopping mall loans in commercial mortgage bond deals have been identified as at-risk of being handed back to lenders, according to research firm and data tracker Trepp. (MarketWatch)

Eviction moratorium complicates rental business- The apartment rental market has navigated the crisis relatively well, according to data from analytics firm Trepp, which tracks a type of real estate loan taken out by owners of commercial properties such as offices, apartments, hotels, and shopping centers, shows. (Associated Press)

Trump Tower's key tenants have fallen behind on rent and moved out. But Trump has one reliable customer: His own PAC- In the first quarter of this year - the latest for which data was available - Trump Tower's commercial spaces were 75 percent occupied, according to Trepp data. That is lower than the occupancy rates for the tower from any year going back to 2013, Trepp reported. (The Washington Post)

Trepp Outlook 'Cautiously Optimistic' But Concerns Are Clear - Of that total, 44% of professionals surveyed in Trepp's 2021 CRE Sentiment Survey also said economic occupancy-not to be confused with physical occupancy-for the office sector would be well below pandemic levels. And 90% also said economic rents would be lower than pre-COVID levels. (GlobeSt.)

Questions or comments on any of the content featured in our monthly snapshot? Contact us at [email protected] or at 212-754-1010.

Disclaimer: The information provided is based on information generally available to the public from sources believed to be reliable.

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