Hotel rooms sit empty. Office buildings have gone dark. Families cook in their kitchens instead of dining out at restaurants and stream movies at home.

The coronavirus pandemic has turned the $4.4 trillion U.S. commercial real estate finance market upside down, even as states start to explore ways to safely reopen parts of the economy after imposing strict lockdowns that cut landlords off from monthly rents.

“We can’t compare it to 9/11. And if you go back to 2008, that was more about overleverage and looser underwriting,” said Ann Hambly, the founder of 1st Service Solutions, a firm that helps commercial property owners navigate loan workouts.

“It didn’t affect everyone,” she told MarketWatch of past downturns. “Here, the whole economy has been shut down and everybody needs help.”

Delinquencies on commercial mortgage-backed securities (CMBS), which are loans on malls, skyscrapers, apartments, offices and other property types packaged into bond deals, stood at 2.57% in March, far below than their 10.06% peak in July 2012 in the wake of the global financial crisis, according to Moody’s Investors Service’s latest tally.

But those figures also don’t fully capture the economic disruptions caused by the coronavirus pandemic, Moody’s analysts warned, adding that property-level “cash-flow stress, particularly across hotels and retail properties,” will trigger more defaults.

How bad could things get? After commercial property spent years soaring to new heights, values slipped 1.3% in March, according to Green Street’s Commercial Property Price Index, and the real estate tracker’s Peter Rothemund sees potential for the hardest-hit sectors to tumble 30%.

Much, naturally, will hinge on how many borrowers struggle to stay current on their debts in the coming months, if property loan defaults spike and whether financing conditions start to thaw after freezing up last month.


“It feels even more uncertain than during the financial crisis.”


— Gary Horbacz, principal at PGIM Fixed Income

Deutsche Bank analysts led by Ed Reardon said issuance of new CMBS debt this year could plunge to $50 billion, down from their initial forecast of $112 billion, in part because bankers still need to find a home for property loans they originally earmarked to sell into new bond deals.

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“CMBS loans on originator balance sheets from before COVID-19 are utilizing balance sheet capacity,” Reardon’s team wrote in a client note Wednesday. “These loans need to be re-marked and sold to free up originator balance sheets for new lending again.”

CMBS, a canary in the coal mine

CMBS is one of the more transparent parts of the U.S. commercial real-estate finance market in terms of flagging performance issues early on, largely because property-level details are recorded in monthly bond reports, unlike the loans held by banks, insurance companies or other lenders.

And already, in the first two weeks of the U.S. coronavirus outbreak, more than 2,600 borrowers with CMBS loans sought potential debt relief, according to Fitch Ratings, which tracked 47% of the relief requests to hotel assets and 30% to retail properties.

That’s likely only a hint of what’s ahead, particularly as retailer sales plunged in March, providing an early picture of the damage wrought by the coronavirus as unemployment skyrocketed and many Americans shut their wallets to all but the essential purchases.

In another sign of the tenuous times for retailers, J.C. Penney Co. Inc.
JCP,
-27.31%

on Wednesday missed an $12 million corporate bond interest payment, while USA Today and Reuters reported the embattled chain store is considering bankruptcy as the pandemic threatens its turnaround plans. Shares of the retailer tumbled 27.3%.

Even recent positive developments, including talk of daily life eventually resuming, come with the caveat that the pandemic will leave scars.

California’s governor this week outlined a roadmap for easing restrictions, but warned no sporting events or concerts will be held in the state anytime soon, while painting a picture of how everyday interactions will be radically altered, including dining out, where waiters may need to wear masks and gloves.

See: Restaurants and hotels, devastated by coronavirus, face long and painful recovery

Meanwhile, there are relief efforts for commercial property owners, which could benefit from some of the Federal Reserve’s up-to-$2.3 trillion in emergency facilities to keep credit flowing in financial markets.

Last week, the Fed expanded its reach to include older commercial mortgage-backed securities, which provided a boost to secondary trading after liquidity dried up in March. But unlike the Fed’s broad backstop of corporate debt, new CMBS issuance remains outside of its reach, casting a shadow over the more-than-$60 billion of debt that borrowers will need to refinance through 2020, per Cantor Fitzgerald estimates.

“It feels even more uncertain than during the financial crisis,” Gary Horbacz, a principal in the structured products division of PGIM Fixed Income, told MarketWatch, adding that while hotel properties often take the first hit from lost travel since room rates and occupancy reset overnight, there are also new questions about the need for office space going forward.

“It’s just unprecedented.”

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