So cal multifamily broker
Economic metrics are signaling that the economy is rebounding at a feverish pace. GDP grew at a 6.5% annualized clip, and unemployment will likely reach sub-5% by year end. Consumers embraced the post-lockdown economy by spending much of their excess savings on travel and leisure. Hotel occupancy and air travel are approaching 2019 levels, and restaurants are once again filled to capacity.
As we highlight in the chart below, the most serious delinquency bucket (loans that are 121 or more days delinquent) is declining, but at a low and measured rate. How do we reconcile this apparent contradiction? Part of the answer likely lies in the somewhat lack of distress experienced throughout the pandemic. However, the story is more nuanced than that. Here, we examine a few main focal points of this nuance. We review what remains in the serious delinquency bucket, and we examine whether exiting loans are becoming current, being worked out through a foreclosure, or following other paths.
Going into July, the 121+ day delinquency bucket had about $16 billion in loans, with roughly 77% categorized as retail or lodging. From July’s remittances, $1.2 billion (7%) exited this bucket, composed of 62% in lodging and 22% in retail. Relying on servicer loan commentaries, the reasons for exiting the bucket are listed below in the table. While modifications in general have slowed down in the last few months, they remain a formidable tool in reducing serious delinquencies. It is interesting to note the low amount of loans becoming current, especially in light of the robust economy. We also note the difference between foreclosure activity in lodging and retail, but can’t infer much, as our sample is only one month.
The current economy is certainly keeping some borrowers from going seriously delinquent; however, while loans are dropping out of the 121+ delinquency bucket, there are additions on a monthly basis. In July, there were additions of $1.07 billion, of which 24% were in the lodging sector and 51% were in the retail sector.
Once again, why aren’t we seeing a swifter decline in delinquencies? The conclusion here is that the strong economy is helping commercial real estate, but rather than quickly bringing struggling properties current, it is helping reduce further distress. The pandemic exposed weak assets, hastening their deterioration. In the retail sector, older and poorly kept centers in slow growth areas will continue to suffer; but there are plenty of quality assets in this space that may only need one more short-term modification/forbearance. The lodging sector situation is similar. Geographies and properties that cater to business and international travel will require longer-term interventions. With this said, lenders and borrowers seem to be more inclined to provide a path to survival in this sector. Workouts, modifications/forbearance, and even going current have been more apparent in lodging than retail. As a borrower, the option to bring the loan current and retain the property seems a good move in a firming/rising market.
Consequently, the contradiction is not really a contradiction at all. At this point in the recovery, those assets that are struggling seem to be doing so due to overall weakness in a changing commercial real estate environment. Retail is evolving, and the robust economy may not help bring all of these loans current. For lodging, many of the still struggling properties will remain that way until business and international travel join leisure travel’s revival.
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