CMBS Delinquencies

While Commercial Real Estate has been in the news a lot lately, the struggles that many had predicted hadn’t translated into a really meaningful change in delinquency….until this May.  In May, commercial mortgage-backed securities (CMBS) delinquencies jumped by 122bp to 3.62%.  This jump was obviously driven by office properties and retail.  While multifamily and lodging we’re both marginally better.  For some context, the all-time high for these metrics happened in July of 2012 as the consequences of the Global Financial Crisis bottomed out.  While this spike is unnerving, the current numbers are nowhere near the highs from a historical context.  

The numbers are likely to get worse in office and retail if workers continue to stay home.  There is also a clear correlation between office and retail as many of the retail spaces were originally constructed with the intention of servicing the workers in offices.  Some of the solutions to this crisis, however, are starting to come into sight from multiple vectors.  While we’ve all heard quite a lot about the desire of some office owners to convert their spaces into multifamily, there is now a more diversified approach.  While converting to multifamily sounds great because there is still a housing shortage, logistically and financially, there are far fewer projects than the brokerage community would like to believe.  But for the well capitalized, creativity means opportunity. 

For example, Silver Star Properties, a REIT from Houston, has announced that they will convert all their properties to self-storage while also acquiring a self-storage company to help them run the assets appropriately.  Silver Star was by no means a big enough player to move the needle by themselves.  But they are indicative of a larger theme.  The problem that work from home presents needs many solutions, not just one.  Creative thinking like this, while bold and fraught with risk, will act in concert with multi conversions and return to work mandates, to eat up the empty space that is available. 

Sources: Trepp, Yahoo Finance