Virus, oil delaying business mortgage payments

The percentage of commercial mortgages marked at 30 days delinquent surged in May as the impact of the novel coronavirus on as businesses from retail to hospitality missed rental payments, and their landlords then missed loan payments.

In May, 7.15 percent of commercial mortgages that had been bundled into securities were at least 30 days delinquent, up 481 basis points from the month before, according to securities data company Trepp. That's the biggest month-over-month increase Trepp has recorded since it began tracking the metric during the Great Recession in 2009. Another 7.6 percent of commercial mortgages that back securities missed May payments, but were less than 30 days delinquent. Even more are in forbearance.

“Everybody who invests in commercial real estate has felt the pinch in one way or another,” said Manus Clancy, senior managing director at Trepp. “Texas has a double whammy of COVID and the oil and gas issue, where the price of oil dropped so sharply that firms in Houston are pulling back in terms of their space needs and the number of employees.”

Commercial real estate investors are confronting issues similar to those faced by investors in residential real estate in the years leading up to the housing bust of more than a decade ago. As with homes, most commercial properties are purchased with mortgages, which are then bundled into securities and sold to investors, whose returns depend on property owners making their monthly payments.

With businesses struggling after government-ordered shutdowns and other social distancing measures, cash-strapped commercial tenants are missing

lease payments and their landlords missing mortgage payments, undermining the value of the mortgage-backed securities. If the debt goes bad, it could blow a hole in the balance sheets of investors, dry up the capital needed to revive the commercial real estate market and hurt the returns of institutions, such as pension funds, on which millions of Americans depend.

The most heavily hit sector, according to Trepp data, was lodging. Nearly 20 percent of hotel loans packaged into securities were at least 30 days delinquent as of May, and Clancy said he expected that number to rise in June. Hotels have been especially hard hit as conferences have been canceled, nonessential business shuttered and the need for social distancing has severely reduced leisure travel.

The Moran, a four-star hotel in the Energy Corridor, for example, announced May 22 that 47 of the employees it had temporarily laid off because of the pandemic should expect their layoffs to exceed six months "due to the likely continuation of the unanticipated,

“Texas has a double whammy of COVID and the oil and gas issue, where … firms in Houston are pulling back in terms of their space needs and the number of employees.”

Manus Clancy, Trepp

dramatic and continuing downturn in the economy due (to) the COVID-19 pandemic and its impact on the hospitality industry."

Lodging was followed by retail, which had a 10 percent delinquency rate, multifamily with 3.3 percent and office with 2.4 percent. In February, before the pandemic became strongly felt in the United States, the overall delinquency rate for commercial mortgage-backed securities was 2.04 percent.

Investors who own commercial mortgage-backed securities have seen the value of their holdings fall. Banks that had agreed, pre-COVID, to make commercial loans that would be packaged into securities and sold to investors are facing significant losses.

For example, JPMorgan Chase & Co., Credit Suise Group AG and Macquarie Group Ltd. agreed to lend more than $7 billion to Eldorado Resorts, a casino business, before the need to social distance, according to a Bloomberg report. The sudden change in the company’s financial stability made it difficult to find investors who were willing to take the debt off of the banks’ hands, meaning they may have to offer the debt at a discount or even come up with the cash themselves.

Fortunately, Clancy said, not many loans that size are stuck in limbo between being agreed upon and being packaged and sold off to investors. “It’s meaningful to the banks,” he said. “But it’s not systemic-risk kind of losses.”