A number of commercial real estate sectors have had trouble paying their mortgage during the COVID-19 pandemic, but none more than the hotel and lodging sectors, according to the Mortgage Bankers Association’s (MBA) November 3Q Commercial Real Estate Finance (CREF) Loan Performance Survey, and its latest quarterly Commercial/Multifamily Delinquency Report.
The lodging and hotel sectors have played a key role driving up the commercial delinquency rate. For example, 22.1% of lodging loans were delinquent in November (up from 21% in October), while just 2.5% of industrial property loans were non-current last month. Meanwhile, only 2.4% of office property loans were delinquent in November, although that figure increased from 2% the month prior.
Retail properties have not fared much better than the lodging sector during the COVID-19 pandemic, according to the Mortgage Bankers Association. Almost 13% of retail loans were non-current last month, a near full percentage point increase from October. Just 1.6% of multi-family mortgages were non-current last month—unchanged from the month before.
“Commercial and multi-family mortgage delinquency rates remain mixed, varying dramatically by property type, and therefore by capital source,” MBA Vice President of Commercial Real Estate Research Jamie Woodwell said in a statement. “Much of the stress in the market is driven by loans, predominantly for lodging and retail properties, that became delinquent in April and May and have now transitioned to later-stage delinquencies. November did see small increases in newly delinquent retail, lodging and office loans, but at levels far below what was seen at the outset of the pandemic.”
Hotel, retail properties suffer as people stay home
It’s not surprising that hotels and retailers were at the top of the MBA’s commercial mortgage delinquency rate charts. Both sectors rely on foot traffic, and there hasn’t been much for either amid the pandemic. Travelers are staying home and the hotel industry could face a multi-year recovery period to get back to pre-pandemic numbers. Meanwhile, brick-and-mortar retail properties have suffered at the hands of online shopping even before the pandemic hit the United States. The pandemic just made the matter worse for physical locations—people who would typically shop in person were forced to join online shoppers and buy their goods from home. Their recovery is not as guaranteed as hotels when the pandemic subsides as more people might have become accustomed to shopping from the comfort of their home.
CRE outlook for 2021
The combination of mortgage delinquencies, increased vacancies and negative rent growth leaves a less than promising CRE outlook for next year, according to Seeking Alpha’s Harrison Schwartz. In fact, he believes the industry could be entering a depression, despite promising numbers from CRE firm CBRE.
“Based on the data, I believe the writing is on the wall,” Schwartz wrote. “Property prices have risen, but that is largely due to supportive Federal Reserve QE mortgage purchasing and the substantial rate cut earlier this year. Put simply, the surge in property prices should not be taken as a sign that commercial property sales volumes are likely to recover anytime soon. In fact, this situation implies commercial property sales may actually decline next year, particularly if long-term interest rates continue to bounce.”
Schwartz also noted the rise of commercial mortgage-backed security delinquency rates during the second quarter of this year and how the delinquency rates briefly surpassed the worst levels seen during the global financial crisis.
“In my opinion, the decline in loan rates has masked the extreme decrease in the commercial property market’s health,” he wrote. “Today we are seeing significant declines in operating earnings among REITs, but low rates have allowed many to refinance or sell at higher capitalization rates. However, this benefit is lost now that long-term interest rates are back on the rise.”
Joe Dyton can be reached at email@example.com.