The CMBS crime rate has steadily improved since peaking in June, but some asset classes are keeping the overall rate high. A new report from DBRS Morningstar takes an in-depth look at last year’s CMBS crime rates and found that retail and hotel properties could be a drag on recovery.
Overall, the CMBS crime rate peaked at 5.88% in June and fell 148 basis points to 4.45% in December. Those numbers aren’t as disastrous as they seem. During the height of the financial crisis, the CMBS crime rate rose to 8.53%. More good news: Since June, the interest rate has steadily fallen in all asset classes.
Despite the positive downward trend, crime rates among retailers and hotels are still surprisingly high. Retail arrears accounted for 17.86% of the total market in June, up from 12.78% by December. Hotels crime rates fell to 19.87% in December from 23.89% in June.
These numbers may not accurately reflect the severity of the arrears. DBRS Morningstar notes that many distressed retail and hotel properties still benefit from indulgence. These loans run the risk of defaulting at any time. With the end of the leniency policy, CMBS arrears could increase, or at least pressure on retail and hotel owners to default.
Despite the potential downward pressure from non-performing loans, DBRS Morningstar predicts the number of late payments will continue to decrease through mid-2021. With vaccines distributed and confidence restored, consumers could return to stores and travel again. As a result, retail crime is likely to fall to 10% and hotel crime to 15% by mid-year.
Other asset classes gained a foothold during the pandemic. The crime rate for offices is 2.2%, for apartment buildings and industrial companies it is only 0.8% and 0.7% respectively. Multi-family and industrial businesses are expected to be stable through 2021, but the office could face fundamental changes due to the pandemic. DBRS Morningstar predicts that demand could fall 20% over the next year, adding pressure to the crime rate. It is expected to rise to 3% to 4% in 2021.
New CMBS activities were also hampered during the pandemic. Kroll Bond Rating Agency found that CMBS loan volume amounted to around $ 55 million at the end of 2020, down from the $ 95 million expected in fall 2019. This is an eight year low for CMBS emissions.
