The U.S. commercial real estate sector is grappling with ongoing challenges as the post-pandemic environment reshapes traditional business models. According to a recent report by credit rating agency KBRA and Reuters, the delinquency rate for commercial mortgage-backed securities (CMBS) has surged, with nearly $12 billion in loans becoming newly delinquent. This rise in delinquency, fueled by the shift in work patterns and consumer behavior, poses significant concerns for the industry’s stability and recovery.
One of the primary factors influencing the rise in delinquency rates is the transformation in work patterns triggered by the pandemic. The post-pandemic era has seen a significant increase in remote work arrangements, prompting businesses to reassess their office space needs. As a result, the demand for office properties has weakened, leading to higher delinquency rates on office-related CMBS loans. In July alone, office loans accounted for approximately 35 percent of newly delinquent loans, amounting to $898.4 million.
Similarly, the rapid growth of online shopping has impacted the retail sector, which has also experienced a surge in delinquencies. Retail property loans constituted the second-highest share of delinquencies in July, standing at 26.4 percent or $683.4 million. The decline in foot traffic and changing consumer preferences have placed additional strain on retail businesses, leading to payment difficulties.
The third segment significantly affected is mixed-use properties, designed for both retail and office purposes. These properties made up 23.7 percent of the newly delinquent loans, equivalent to $613.9 million. The combination of reduced foot traffic for retail and decreased demand for office space has amplified the challenges faced by this particular category.
As the delinquency rates climb, more loans are moving into the category of “special servicing,” where they receive increased attention and management due to the heightened risk of default. The total special servicing balance on multi-loan CMBS has surged to $14 billion, marking the largest rise since August 2020.
Regional banks, acting as CMBS special servicers, are encountering increased demand for their services as the number of delinquent loans grows. This rise in demand has resulted in a surge in special servicing fees, as seen by KeyBank’s subsidiary, KeyBank Real Estate Capital. CEO Chris Gorman reported a record-setting performance for two consecutive quarters in special servicing fees.
The prolonged stress in the U.S. commercial real estate sector raises concerns about the stability and recovery of the market. The continuous rise in delinquency rates over four consecutive months, culminating in a total delinquency rate of 6.44 percent, underscores the urgency for proactive measures to mitigate the situation.
The surge in delinquency rates within the U.S. commercial real estate sector serves as a stark reminder of the lasting impact of the pandemic on traditional business operations. As the shift to remote work and online shopping continues to reshape the landscape, various segments of the commercial real estate market will continue to feel the strain for some time.