The values for existing commercial mortgage-backed securities (CMBS) have plummeted and there has been no relief from the federal government. Many commercial properties are experiencing cash-flow stress. This will lead to serious distress and ultimately as a result a significant number of defaults over the next few months.
In the U.S. CMBS borrowers continue to request relief from mortgage payments with almost 5,500 asking master servicers to renegotiate terms and delaying payments. According to Fitch Ratings the past month saw requests for almost 20% of CMBS totals loans exceeding $100 billion. Loans secured by hotels, retail and apartments represent about 75% of the total request for forbearance. In addition, loans securitized by Freddie Mac borrowers increased 500% by borrowers seeking government assistance.
Some borrowers are requesting more than one year of forbearance which appears unreasonable at this time. Most forbearance terms are for a 90 day delay of payments, unfortunately 90 days will not be enough time for most businesses to recover and begin paying their contract rent. Borrowers cite non-payment from tenants and closed businesses due to government restrictions as the cause.
A return to the old normal way for landlords, borrowers, banks and holders of CMBS is not going to happen. The valuation of income producing property is based upon the accuracy and viability of future income streams. The projection of future rents has now changed so that current real estate values are not in-line with the future income streams. With the decline in lease rates coupled with an increase in vacancy due to less demand and tighter lending requirements the value of properties will decline. The Covid-19 pandemic has drastically impacted the viability and valuation of all types of commercial real estate. The days of buyers and lenders paying inflated prices are over.
The Green Street Commercial Property Price Index declined by 9.4% in April. Prices of every type included in the index were adjusted lower, some more than others. The index is down 10.4% from its peak reached at the end of last year.
