NEW YORK–The overall credit performance of commercial real estate (CRE) loans in bank portfolios continues to show signs of pandemic-related stress with increasing delinquency rates and charge-offs and downward migration of risk ratings, according to a new analysis released by Trepp.
“While anecdotal feedback from lenders indicates that relief granted through deferrals and forbearance early in the pandemic has kept delinquency rates from spiking further, several market sectors are clearly in distress,” Trepp said in its analysis. “Unsurprisingly, the delinquency rate for loans on hotels more than doubled, jumping from 1.3% in Q2 to 3.2% in Q3. Delinquency rates for loans on retail properties, while down slightly from Q2, are also significantly elevated and currently stand at 1.44%. The decrease in the retail delinquency rate in Q3 was in part driven by many loan charge-offs that effectively reduced the delinquent balance.”
Trepp said Risk Ratings, which are both reflective of current loan performance and expectations for future performance, have shifted significantly downward from pre-pandemic levels.
On the company’s Standard Rating scale, a 1 to 9 risk rating scale that normalizes the risk ratings for all T-ALLR participants, the percent of loan balance rates 1 to 3 dropped from 42% to 31%, while loans rated 6-9 jumped from 6% to 22%.
“As with delinquency rates, performance has been uneven across property types with loans on hotel and retail properties showing the greatest decline in Standard Rating,” the company said. “For hotel loans, the balance rated 1 to 3 dropped from 36% to 3.6% while loans rated 6 to 9 spiked from 5.1% to 74%.
Trepp said its Anonymized Loan Level Repository (T-ALLR) bank loan data consortia captures detailed loan characteristics, activity, and performance on all CRE and commercial and industrial (C&I) loans held on the balance sheet of participating banks. As of Q3 2020, the outstanding balance of active loans in the T-ALLR CRE portfolio stood at $146 billion for CRE loans and $34 billion for Construction loans, an overall increase of $1 billion from Q2 2020, the company said.
Delinquency Levels
“At the portfolio level, delinquency rates for CRE loans started reaching levels not observed since the recovery period following the last recession,” Trepp stated. “Delinquencies continue to occur unevenly across property types, have not occurred evenly across the portfolio, and continue to be reflective of the sectors of the economy that have been hardest hit by the economic shutdown. When viewed by property type, retail and lodging show delinquencies that are much higher than other property types while industrial, office, and multifamily properties are generally performing in line with where they were performing in the 2-3 years pre-pandemic.”
The company said it found delinquency rates for loans below $1 million in outstanding balances are outpacing the delinquency rates for larger loans, but added much of this difference can be attributed to the historic overall lower performance of loans in this cohort relative to larger loans.
A ‘Clearer Picture’
According to Trepp, measuring the percentage increase in delinquencies the quarter end prior to the pandemic (Q4 2019), the delinquency rate for sub $1 million loans is up 27%. For loans between $1 million - $5 million the increase is 66% and for loans between $5 million - $25 million the increase is over 235%, the company stated, adding the increase, in percentage terms, cannot be calculated for loans above $25 million because there were no loans delinquent in these cohorts in Q4 2019, despite the loans representing more than a third of the total portfolio outstanding balance at $52 billion.
“Cutting the more than 30-day delinquency rates by loan size and property type provides a clearer picture of where the areas of distress live,” Trepp reported. “The worst performing segments are hotel loans in the middle loan size cohorts and large retail loans.”