Trepp: Future Unclear for Retail Sector Amid Wave of Maturing CMBS Loans

The delinquency rate for CMBS retail loans 30 days or more past due dropped 22 basis points to 5.38 percent in February, which compares favorably with other property types. The delinquency rate for office loans, for example, was 6.15 percent. The delinquency rate on CMBS retail loans is now down 286 basis points below the peak set in March 2012.

However, part of the reason retail leads the march downward on delinquency rates, the report says, is that lenders were not as patient with retail during the economic recovery, choosing to foreclose on borrowers more quickly than in other sectors.

“Retail delinquencies recovered more rapidly than other major property types, as special servicers were faster to cut their losses and foreclose on distressed retail properties, as opposed to the ‘extend and pretend’ approach taken with a lot of large office and multifamily loans during the slow recovery,” the report says.

Regardless, new CMBS issuance for retail is high, surpassing $15 billion in each of the past three years and nearly reaching $25 billion in 2013. An increasing percentage of CMBS retail issuance is going to single-asset/single-deals, which the report suggests is a reflection of market trends.

“The large trophy-type assets or portfolios financed by these deals, paired with their relatively easy-to-analyze structure, made them more appealing to wary CMBS investors,” according to Trepp. “Growing use of this deal type also supports the theory that the capital markets are shifting their assets toward high-end, luxury, prime-location retail properties.”

Although the vital signs of the retail sector are generally trending upward, the sector’s future is murky. A wave of 10-year CMBS loans originated during the height of the pre-recession boom will reach maturity over the next three years through 2017, which could lead to a rash of defaults as “borrowers assess their sale or refinance possibilities,” the report says. CMBS retail loans account for 30 percent of the $300 billion in maturing CMBS loans.

Further obscuring the future is the ever-increasing role of the Internet, which hit the retail sector hardest as consumers no longer need to visit brick-and-mortar stores for many purchases. Although this challenge isn’t new, retailers continue to change strategies to account for it.

Examples of trends to combat online sales include retailers keeping less inventory on site — therefore needing less square footage — and building more for experiential environments, which online retailers can’t offer.

The combination of changing needs of retail borrowers and the wave of maturing loans means the sector could look radically different — for better or for worse — in the near future.

“Many of the properties up for refinancing will be reappraised in a retail environment very different from what it was 10 years ago,” says Trepp. “Depending on the landscape in the next five years, this could put pressure on borrowers to contribute more capital or sell properties at discounted values.”