Missed loan payments are expected to approach Great Recession levels in the third quarter of 2020, part of the continuing fallout from a U.S. economy that remains virtually frozen.
The hotel and retail sectors are expected to have the highest delinquency rates, according to projections by Fitch Ratings.
Before the coronavirus pandemic, the delinquency rate had been steadily falling, and stood at just 1.31 percent in March. Now it’s expected to reach as high as 8.75 percent by the end of September — approaching its peak of 9.01 percent recorded in July 2011.
Earlier in the month, Fitch found that 2,600 commercial real estate borrowers requested debt relief, with borrowers against hotel and retail assets among the most asking for help.
While defaults are expected to spike in the months to come, Fitch also projects a decline in new loans issued, fewer maturing loans and fewer resolutions by special servicers.
Hotel and retail delinquencies — hit particularly hard by the coronavirus as travelers and shoppers stay home — are expected to increase to 30 percent and 20 percent, respectively. Those numbers would greatly exceed previous highs of 21.3 percent and 7.7 percent. In March, 1.4 percent of hotel loan payments were delinquent and 3.5 percent for retail.
And as retail tenants fall behind on their rent payments, class B and C malls — and outlet malls whose owners have limited ability to access capital to inject additional equity — are expected to default. Those loans maturing this year are also at a higher risk of default because of scarce liquidity for this property in the current environment.
The lucky ones
But loans secured by top tier-regional malls with pricier square footage are expected to fare better, and properties lucky enough to have “essential” retail tenants that can remain open — like supermarkets, pharmacies and banks — will also be less affected.
The multifamily sector is also expected to take a hit, especially student housing, as schools stay closed. Multifamily properties with many tenants who are hourly wage or service employees who interact with the public are also expected to miss loan payments.
But in a panel discussion this week on the multifamily market, Lightstone’s David Lichtenstein told The Real Deal that of all the “the food groups,” multifamily is the best positioned to weather the storm. He noted that tenants are, for the most part, continuing to pay rent and banks are still working with owners. Lichtenstein added that could change if the crisis stretches beyond six to nine months.
Fitch’s delinquency projections don’t include loans in forbearance. Many borrowers are frantically seeking to make arrangements with their lenders, while multifamily borrowers with federally-backed mortgages can receive forbearance from Fannie Mae and Freddie Mac as part of the federal stimulus package.
At the beginning of April, a Fitch analysis found that 105 multifamily borrowers, representing $810.2 million in mortgage loans, had already put in such requests for assistance.