Few Delinquent Loans Are Becoming Current As Economy Rebounds

GlobeSt. – The economic comeback post-COVID is indeed helping CRE generally–but instead of bringing delinquent properties current, it’s keeping more distress at bay.

A new analysis from Moody’s Analytics REIS notes that the pandemic “exposed weak assets, hastening their deterioration,” particularly when it comes to older retail centers in slow growth areas and lodging properties catering to business travel.

But despite that, “lenders and borrowers seem to be more inclined to provide a path to survival in this sector,” write Moody’s David Salz and Thomas LaSalvia. “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.” 

The 121+ day delinquency bucket going into July contained about $16 billion in loans, and more than three-quarters were in the retail or lodging sectors. Around $1.2 billion left that category, with modification or forbearance accounting for more than half of that number.

“While modifications in general have slowed down in the last few months, they remain a formidable tool in reducing serious delinquencies,” note Salz and LaSalvia. “It is interesting to note the low amount of loans becoming current, especially in light of the robust economy…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.”

They note that at this point, struggling assets are likely laboring under “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,” according to Salz and LaSalvia. “For lodging, many of the still struggling properties will remain that way until business and international travel join leisure travel’s revival.”