By the Numbers
Lessons learned in CMBS in 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
One overarching lesson from 2021 is that forbearance works. The wave of commercial real estate delinquencies that rapidly built up during the early stages of the pandemic has not transitioned into a tsunami of defaults. A corollary is that forbearance was successful, in part, thanks to a backdrop of rapidly appreciating property prices across the multifamily sector. Lesson two is that there will always be unpredictable beneficiaries of a crisis, and among the beneficiaries of the pandemic were the industrial and self-storage sectors. The lingering question is whether or not the rather dramatic property price appreciation will be supported as the economy and life normalizes, or if some arguably bubbly areas may deflate.
#1 Forbearance works
The delinquency rate for US CMBS securities peaked at 9.0% in August 2020 and has been falling steadily since then, reaching 3.6% in November 2021. CMBS loans in conduit or SASB deals are marked delinquent while they are in forbearance, so that rate includes loans that are in forbearance. Although the transition rates for loans from 30-days delinquent to 90+ days delinquent was close to 100% during the latter half of 2020, there has been virtually no increase in loan balances in foreclosure, REO or nonperforming matured loans since the pandemic began (Exhibit 1).
Exhibit 1: Delinquency balance by status
Note: FCL is foreclosure; REO is real estate owned; NMB is nonperforming matured balloon.
Source: S&P Financial Services
Seriously delinquent balances have been trending down since September 2020 because those loans that are delinquent – about two-thirds of which received some form of forbearance – have been gradually curing and have returned to reperforming status. The property type breakdown of the loans that are still in forbearance as of November 2021 is: 60% lodging properties, 28% retail, 5.2% office, 1.3% multifamily and 4.7% other. Although some CMBS loans will likely transition from delinquency or forbearance to foreclosure or REO, so far the impact of forbearance appears to have dramatically buffered the impact of the pandemic on commercial real estate performance, and allowed borrowers the time to recover as the economy rebuilt momentum.
Exhibit 2: Green Street commercial property price index (CPPI)
Note: All property CPPI is retail (20%), office (17.5%), apartment (15%), healthcare (15%), industrial (10%), lodging (7.5%), net lease (5%), self-storage (5%), manufactured home park (2.5%), student housing (2.5%). Retail is mall (50%) and strip retail (50%).
Source: Green Street Advisors
#2 Crisis has its beneficiaries
During the initial stages of the pandemic, when overall commercial real estate prices dropped suddenly by 10% (Exhibit 2), many analysts were projecting that prices would fall by 15% to 30%, similar to the drop seen during the housing crisis. That didn’t happen. Thanks partially to forbearance and partially to a surge of people buying homes and renting homes outside of urban cores, both multifamily and single-family property prices began to appreciate rapidly. The pandemic-driven desire for less dense housing hit a two-decade long housing shortage head-on, driving single-family house prices and multi-family rents up roughly 20% year-over-year in 2021. The best performing CRE sectors since pre-Covid are also entirely pandemic-driven: self-storage (66%), industrial (53%), manufactured homes (34%) and apartments (22%).
Exhibit 3: Green Street sector-level property price indices
Note: Data as of November 2021.
Source: Green Street Advisors
#3 A correction or stabilization depends on the sector
There is some evidence that both single-family and multifamily property prices are beginning to plateau. Fundamentally the long-term outlook for both remains quite strong given two decades of under building. Moderation in home price appreciation would be reasonable and expected in 2022. Further appreciation could be evidence of frothy markets, with a potentially higher likelihood of a modest correction. Industrial properties – which have rapidly appreciated due in part to a business shift towards home delivery and a last mile accommodation – are likely to be sticky at new, higher levels as the need for additional warehouse capacity should be permanent.
What the pandemic may have also forever changed is preference for remote or hybrid work, and how that impacts the need for office space – especially in dense, urban cores. Office property price remain down 4% compared to pre-Covid levels. Only lodging prices are still broadly in the red, down 1%, but travel is expected to bounce back. Office work is possibly permanently on a track to be done more from suburban offices, co-working spaces and homes, decreasing the need for a large urban footprint. If there is any lesson from 2021, it’s that the new normal is not going to look exactly like the old normal.
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