Analysis: A ground level view of delinquency rates

The best and worst CMBS performers in top US markets can be explained by their underlying real estate and economic fundamentals, finds Al Barbarino

The departure of office tenants from both urban and suburban sections of the Washington, DC, area has led to one of the highest CMBS delinquency rates among the largest Metropolitan Statistical Areas (MSAs).

In Detroit the high delinquency rate of 8.66 percent is tied to a broader range of asset types.

While Houston’s MSA has a rate of just 1.36 percent, experts say it is likely to rise due to energy market volatility, even though natural gas prices have bounced back from Q1 lows and oil prices have picked up ground after the 12-year lows hit early this year.

The three examples illustrate how underlying issues with real estate and local economies impact the CMBS delinquency rates for various MSAs.

An analysis of Trepp data shows that, among the largest markets in the country (see chart for list of key MSAs), the DC and Detroit areas have fared the worst while major markets like New York City, San Francisco, Houston and Dallas performed well.

“Some of these markets were the hot tamales when CMBS was really hot and since then rents have gone down and life has changed, and it will be more difficult to refinance in some of these markets than in others,” says Brian Corrigan, a managing director in the Capital Markets team at Colliers International.

“When you have a decreasing cash flow in any asset because of new product online or a slowing economy, with people leasing less space and more vacancy, a landlord can no longer push the prices they once did.”

Talia Regev, a senior associate with Colliers, notes those top markets across the country have consistently outperformed national averages: “We don’t expect to see a large increase in those delinquency rates.”

That said, some of these markets have seen many years of growth. In San Francisco, for example, “rents were driven so high and fast from the tech companies that investors into these markets are concerned that there is only one way to go after things were so vibrant the last four years – flat or down,” says Corrigan.

In New York, concerns exist as well. The high end of the market, particularly multifamily, is considered by many to be overheating, with condo sales tapering off and rents dipping for the first time in years in 2016.

If these trends continue, the respective 1.37 percent and 1.92 percent rates in these MSAs are likely to rise as the rest of the year plays out.

On the other hand, there’s some good news for the Detroit area. Colliers Q1 nationwide report shows that some of the largest office occupancy gains in Q1 were seen in Detroit, where vacancy rates dropped by 80 basis points quarterly.

The top 10 largest troubled loans in the Detroit are more diversified than those in the DC area, with the top three representing retail properties, four tied to office, and one each in industrial, hotel and multifamily. The diversification could ultimately help avoid major increases to the already high rate.

Washington, DC

The Washington, DC, area, office market has been under significant stress. The high delinquency rate of 8.63 percent for the ‘Washington-Arlington-Alexandria, DC-VA-MD-WV’ area is reflective of various tenants, many tied to government, downsizing or moving away.

Trepp data shows that, with the exception of a Westin Hotel and a student housing complex, eight of the top 10 largest delinquent loans in the DC-area MSA were office properties.

In June Trepp reported that the largest of those, the $155 million Portals I note, which makes up 23.3 percent of the collateral behind GCCFC 2006-GG7, would not be able to refinance and had been sent to special servicing.

Sean Barrie, a research analyst with Trepp, notes that many tenants have also fled from suburban offices in Maryland and Virginia in the wake of government downsizings.

A report from Colliers shows that just 24,336 sq ft of positive absorption occurred in the DC market in Q1 of this year, with consolidations in the legal service industry bringing demand down from the previous quarter.

“This is highlighted by the 15 percent reduction in space by Miller Chevalier as they moved into 900 16th Street, NW…. [whereas] in comparison, during last quarter, a number of law firm tenants relocated to new locations but maintained roughly the same amount of space,” the report states.

“The only substantial positive net absorption came from the World Bank’s expansion, which added three divisional offices at 1825 Eye Street NW.”

The report also showed the correlation between the office performance and jobs. Over the course of the previous year 4,600 new office-using jobs had been created, a growth rate of 0.9 percent; but that compared to the 10-year historical average of 3 percent.

“Clearly, the primary driver of new demand for office space, seats in chairs, has slowed significantly, and net absorption is beginning to be impacted,” analysts wrote in the report.

The government sector was responsible for 2,900 jobs, the most of any sector, and 1,300 were created by the Federal Government. But, analysts noted, “even with job growth, the federal government is expected to decrease their real estate footprint by 15 percent for every lease that rolls.”


The ‘Houston-Baytown-Sugar Land, TX’ MSA recorded the lowest vacancy rate among the key MSAs, at just 1.36 percent. But the market will likely see that rate rise as implications of the lagging US energy and oil sectors take their toll.

“There have been recently completed buildings leased to energy related entities that are having trouble leasing,” Corrigan says.

As reported previously in Real Estate Capital, many of Houston’s largest employers – Anadarko, Baker Hughes BP, Chevron, ConocoPhillips, Halliburton and Shell Oil – have announced layoffs, and the city lost around 40,000 jobs due to the oil downturn.

“There’s virtually no way to get a new office deal or multifamily deal done,” Jason Walker, senior vice president, commercial real estate lending, at Bank of Texas, said in May. “We’re glad we didn’t try to stretch and play in this space.”

In March, S&P downgraded three classes and put on “watch negative” the $1.7 billion CMBS conduit LB-UBS Commercial Mortgage Trust 2006-C3 after a loan on Houston’s Northborough Tower office tower was forced into maturity default following Noble Energy’s departure.

Among other problem loans, Fitch said that month that it was monitoring the four-office tower Two Allen Center backing the second-largest loan in the $1.3 billion JPMCC 2011-C4 after that building’s largest tenant, Devon Energy Production Company, vacated.

“Houston is so heavily concentrated with an energy component that you will see that 1.36 [percent] number go higher,” Regev says, pointing to the Houston MSA delinquency rate. “And it’s a function of that economy softening up.”

Click here to see CMBS delinquency rates for select MSAS.