Vacancies fuel a rise in commercial loan delinquencies

Commercial and multifamily delinquency rates increased in each of the first two quarters this year, but delivered a mixed bag in the third quarter.

Greater vacancies have consistently caused delinquency rates on commercial mortgage-backed securities and multifamily loans from the government sponsored enterprises to increase since the pandemic, while other companies have benefitted from stabilizing prices, according to a Thursday report from the Mortgage Bankers Association.

"Commercial mortgage delinquencies increased for CMBS and GSE loans in the third quarter and decreased slightly for banks and life companies as pressures remain in certain segments of the market," said Reggie Booker, MBA's associate vice president of commercial real estate research, in a press release. "Property values have stabilized, but loan performance is impacted by shifting property fundamentals, including higher vacancy rates and slower rent growth. Delinquency performance remains highly dependent on property type and loan structure."

The report analyzed commercial delinquency rates for the top five capital sources: commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac. The five combine for more than 80% of commercial mortgage debt outstanding.

Each capital source tracks delinquencies in different ways, so rates are not directly comparable.

CMBS loans 30 or more days delinquent, or now real estate owned, hit 6.59% in the third quarter, up 0.23 percentage points from the second quarter. CMBS delinquency rates have ticked up in every quarter since the fourth quarter of 2022.

Freddie and Fannie loan payments 60 or more days delinquent increased 0.04 and 0.07 percentage points to 0.51% and 0.68%, respectively. Freddie delinquency rates have risen in every quarter since the first quarter of 2023, while Fannie delinquency rates have been more volatile.

Freddie expanded its multifamily mortgage-backed securities program last November by establishing a new Committee on Uniform Securities Identification Procedures for municipal bond investors.

But life company portfolios and banks and thrifts each saw marginal decreases in their delinquency rates, dropping 0.04 and 0.02 percentage points to 0.47% and 1.27%, respectively. Life company portfolios' delinquency rates account for payments 60 or more days late, while banks and thrifts consider payments 90 or more days late or nonaccrual. 

Residential mortgage delinquencies also increased six basis points to 3.99% in the third quarter, the second-highest delinquency rate since an all-time low was recorded in the second quarter of 2023, the MBA found in November.

What caused higher delinquency rates?

Vacancy rates have risen sharply since the pandemic forced companies to adopt remote and hybrid work styles. New York's office vacancy rate hit 13.4% in the third quarter last year, up from 8.3% in the first quarter of 2019, according to Moody's. If landlords lose tenants and their rent, they are less likely to make loan payments. 

While Moody's expects office delinquencies to rise further by the end of the year and into 2026, the overall vacancy rate fell by 20 basis points last quarter, the first year-over-year decline since the first quarter of 2020, according to CBRE. And in the second quarter, the multifamily vacancy rate fell to 4.1%, its lowest level since 2022, according to CBRE.

Economic uncertainty has also caused investors to use caution in their rent growth assumptions, as rent declines were seen in 16 of the top 30 metros, according to Baker Tilly's Commercial Real Estate Market Report for the third quarter.