The exposure to repossessed property in commercial mortgage bonds issued since the financial crisis is rising rapidly, and the decline in the oil and gas industry is largely to blame, according to Fitch Ratings.
To be sure, the bulk of CMBS loans secured by repossessed property were issued before the financial crisis. The overall exposure in mortgage bonds rated by Fitch through the end of May was 387 assets with an outstanding balance of $6.3 billion, 94% of which are in CMBS 1.0 deals.
The remaining $398 million in repossessed assets are held in CMBS 2.0 transactions, and that represents a nearly 30% increase from the $303 million at the end of December 2017, and a more than five-fold increase from $82 million at the end of December 2016. (The year-end 2015 tally was just $33 million.)
Not surprisingly, retail properties lead with 42% of the total outstanding balance of REO followed by office at 38%. Fitch expects this trend to continue as CMBS 2.0 defaults further increase.
The property type concentration of repossessed CMBS assets 1.0 and 2.0 assets differ. Repossessed assets in older deals are primarily retail (43%), followed by office buildings (39%) with hotels a distant third (6%).
The six largest retail repossessed assets are all underperforming regional malls which include the Killeen Mall, Sierra Vista Mall and Lakeside Mall. “Special servicers are having greater difficulties repositioning and/or stabilizing these assets prior to marketing them for sale,” the report states.
Conversely, repossessed assets in post-crisis deals came largely from 2014 deals and were comprised of multifamily and hotel properties. These loans defaulted due to the decline in the oil and gas industries, with the top two geographic concentrations in North Dakota (28%) and Texas (26%). These two properties types have been hard hit by dried up demand for housing and lodging, especially in the tertiary markets surrounding the Bakken and Eagle Ford shales.
The largest outstanding repossessed asset in a post crisis CMBSis the States Addition Apartments (WBRBS 2014-C22; $25.5 million) in Dickinson, North Dakota. The loan was transferred to special servicing in February 2016 and has been REO since September 2017. With the recent increase in oil prices, the property was 97% in May 2018.