CMBS Loan Disposition Volume Plunges Amid COVID; Losses Climb

The first edition of this article was originally featured in The Mid-Year 2021 Magazine, which contains research from Trepp and Commercial Real Estate Direct. See below for an updated piece. Access the magazineto see more commercial real estate and CMBS insights.

Last year, only 219 troubled CMBS loans totaling $3.4 billion were liquidated with losses, marking the lowest annual volume since Trepp started keeping such records more than a decade ago. That volume was roughly 40% of the $6.03 billion of liquidations in 2019 and was the result of servicers expecting the coronavirus pandemic to be a relatively short-term hiccup in markets.

The $3.4 billion of loans that were liquidated suffered a loss of 59.5%. That compares with the 64.4% of loss severity for liquidated loans in 2019.

It's very possible that liquidation volumes will start taking off, given that volumes increased sharply following the GFC. In 2010, for instance, as the economy was on the cusp of starting its recovery, $9.97 billion of CMBS loans were liquidated, with a loss severity of 45.2%. The following year, $15.63 billion was liquidated and in 2012, the volume increased further, to $16.7 billion-the high-water mark in terms of liquidations.

Given the strengthening of the economy as more areas lift COVID-19-related restrictions, the number of CMBS loans that are delinquent or in special servicing has steadily declined. The percentage of loans with the special servicer, for instance, fell to 7.79% in August, representing the eleventh consecutive month that the rate has declined. Meanwhile, the percentage of loans that are more than 30-days delinquent declined last month to 5.64% from a 9.02% high seen in August of last year.

From the beginning of 2021 through August 2021, 203 loans with a balance of $2.64 billion were liquidated. About half of the total loans liquidated were retail loans with a balance of $1.27 billion, which suffered $888.15 million of losses. Additionally, $735.74 million of loans against office properties were liquidated. Those saw a loss of $574.7 million.

Among the big-ticket dispositions were the $202.6 million Westfield Centro Portfolio, backing the by five Westfield malls located across the U.S., and the $143.3 million Lafayette Property Trust, which backed nine offices in Alexandria, VA. The Westfield Centro Portfolio was resolved in August 2021 with a loss of $195.4 million, a 96.43% loss severity and the Lafayette Property Trust was written off in full in January 2021.

Those loans are exceptions, however, as the overwhelming majority of CMBS loans-163 of 203-that were liquidated since the start of last year had a balance of $15 million or less. But the 23 loans with balances of more than $25 million each that were liquidated suffered $1.13 billion of losses. Despite the recent declines in the volume of loans that are either delinquent or in special servicing, it's likely that liquidation numbers will start to increase.

Public link

Please use the above public link if you want to share this noodl on another website.