The commercial mortgage collapse, which stalled many distressed debtors at the start of the pandemic, never materialized as the government bailout packages created unprecedented collaboration between lenders and borrowers. However, certain property types remain fragile and could be mature choices after the stimulus ends, said Kingsley Greenland, CEO of DebtX.
In the early days of the shutdown, distressed borrowers made investors, fueling the likelihood of a collapse in the commercial credit market.
"Sure, a handful of new buyers and some sideline returnees were looking for high, above-market returns, but they were quickly disappointed," wrote Greenland. "Investor returns have tightened rather than eased. Distressed asset prices rose amid looming credit crunch."
This was due to the fact that the volume of non-performing loans, particularly for hotel and retail properties, was higher than in previous years, but remained close to historically low levels.
Since last June, the number of late payments for commercial and apartment buildings for all types of investor mortgages peaked at 6.4% in August, before falling to 5% in March, the Mortgage Bankers Association reported earlier this month.
Hence, the "surprising lack" of distressed loan sales by lenders wanting to remove these mortgages from their books has created an imbalance between supply and demand.
"Stimulus packages kept many companies liquid and banks found a benevolent regulatory environment that encouraged collaboration with borrowers," said Greenland. "Routine loan extensions without adverse regulatory consequences – unknown in previous financial crises – have created a safe haven for bad loans."
Despite the lack of bad loan sales, the overall market was quite active over the past year; The volume of DebtX is much higher than in the previous twelve months, said Greenland.
"The sellers wanted to rebalance a loan portfolio based on changing market conditions and not throw out bad loans," Greenland continued. "They have optimized their balance sheets on a risk-adjusted basis in order to move their institutes forward."
But distressed commercial mortgage stress will remain in the market for some time.
"The clock is likely ticking for weakened office, retail and health credit," Greenland said. "It will be interesting to see what happens after the stimulus payments go through the system."
Despite the recent improvement, the latest data on commercial mortgage-backed securities tracked by Fitch Ratings shows hotel defaults in March were 16.72%, down just under 8 basis points from February.
However, retail real estate saw a sharp improvement of more than a full percentage point to 9.01% in March from 10.08% in February. This was due to a sharp decline in retail property arrears from 17.48% in February to 14.39% in March.