According to Trepp, the commercial mortgage-backed securities (CMBS) delinquency rate moved significantly higher in October, as investors continued to ask whether the glass was three quarters empty or one quarter full. In October, the delinquency rate for U.S. commercial real estate loans in CMBS moved up 21 basis points to 9.77 percent. The CMBS delinquency rate currently sits at its second highest level ever, as only the 9.88 percent reading in July 2011 was higher. After experiencing a big dip in the delinquency rate in August, the rate has now increased for two straight months.
The tone in the CMBS market had been extremely negative since the beginning of the summer. CMBS investors watched as spreads rose sharply and lenders retrenched from making new loans. Many CMBS investors began to whisper that the impressive rally in CMBS from mid-2010 through May 2011 had taken the market too far, too fast. At the same time, commercial real estate professionals made similar comments about the lofty pricing of trophy properties in the U.S. earlier this year.
This negative sentiment continued for the better part of October. Word of layoffs at origination and trading shops on Wall Street jolted the market further. Spreads continued to race upward—ultimately hitting their highest levels since mid-2010. Researchers at some investment banks offered very bearish predictions for the levels of CMBS issuance in 2012.
With a ton of 2007-originated five-year loans coming due in 2012, the hope that new CMBS issuance would provide a safety valve of sorts for commercial real estate borrowers seemed more and more remote. The market was granted a big reprieve late in October, however, when a European bailout program was announced. The news lifted virtually all U.S. equity and debt markets and CMBS was no exception. The announcement helped push CMBS spreads sharply lower and increased hope that the worst was behind the market for the time being.
Unfortunately, an improvement in CMBS spread levels and a reduction in market pessimism takes time to manifest itself in the CMBS delinquency rate. The result has left CMBS delinquencies at their second highest level in the history of the market.