The number of commercial real estate borrowers who requested debt relief during the escalation of the coronavirus outbreak in the U.S. has lurched to 2,600, with borrowers against hotel and retail assets among the most asking for help, one ratings agency found.
The borrowers represent some $49.1 billion of mortgage loans, according to new findings from Fitch Ratings, which analyzed debt-relief inquiries logged by Wells Fargo, Midland Loan Services, Keybank National Association and Berkadia Commercial Mortgage for the two weeks ending March 29. Those firms represent the largest servicers of commercial mortgage-backed securities and Freddie Mac borrowers.
There is no precedent for the number of borrower requests for debt relief, given the national scope of Covid-19, said Adam Fox, senior director of structured finance at Fitch, in an email. Even when borrowers ask for assistance during natural disasters, for instance, the requests are limited in geographic regions and impact fewer property types.
“Even with the last economic recession, it took years for delinquencies to peak at 9 percent in July 2011, while in this instance we expect material increases in delinquencies over the next three months,” Fox added.
The ratings agency noted that merely asking for assistance does not signal a default. Still, 87 CMBS loans, representing $2.8 billion, have already been sent to special servicing, with the number of troubled deals anticipated to rise in May and June, as skipped loan payments and other requests for assistance filter in.
“The number of loan defaults will depend on how servicers handle these requests and the types of relief that are negotiated,” Fox said. “It is Fitch’s hope that forbearances can be addressed as non-transfer events and therefore not considered a loan default.”
By addressing relief requests as “non-transfer events,” potential fees to borrowers would be reduced, but more storied assets may need loan modifications beyond short-term forbearance, leading to formal transfers to special servicing, he added.
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Scores of commercial tenants, large and small, have already signaled to landlords that they cannot pay rent, and government mandates have forced businesses to shutter. That has led borrowers to ask their financial institutions to delay loan payments, reallocate funds to cover debt service or operating expenses, and waive defaults, Fitch said.
Among the borrowers who have sought relief are 42 single-asset, single-borrower CMBS deals backed by hotel and retail assets, among the industries slammed most by Covid-19, Fitch found. In particular, hotel-secured transactions comprised about 47 percent of the asks for relief; 30 percent stemmed from deals backed by retail assets.
The ratings agency’s analysis also found that 105 multifamily borrowers, representing $810.2 million in mortgage loans, on Freddie Mac Capital Markets Execution deals have put in calls for assistance. These deals are not expected to head to special servicing — and none have so far — because of Freddie Mac’s forbearance program, Fitch found.
Tom Barrack, CEO of Colony Capital, predicted that Covid-10 will trigger a collapse of commercial real estate lending, given the mass government-mandated closures around the country. The economic fallout from the coronavirus has already put the CMBS market, which saw nearly $100 billion of new issuance in 2019, on lockdown.
Another report last week from Trepp, which tracks the commercial lending industry, predicted that rising defaults among commercial mortgages are “virtually assured,” potentially skyrocketing to 8 percent from 0.4 percent because of Covid-19. The analysis on 12,500 commercial loans also found that the hotel and retail sectors will be the hardest hit, with Trepp forecasting that hotels will experience a 35 percent default rate compared to 16 percent for retail.
The Federal Reserve has implemented a series of measures to boost credit to businesses and individuals amid the crisis and said it would expand its credit-buying program to include agency-issued CMBS loans. But that move excludes deals not backed by government agencies, calling on some CMBS investors to ask the central bank for more assistance, the Financial Times reported.
Write to Mary Diduch at md@therealdeal.com