NEW YORK, Dec 20 (Reuters) - The balance of delinquent loans backed by commercial real estate fell to a seven-year low of $20.9 billion in November, down two-thirds from a peak of more than $60 billion after the financial crisis, Morningstar Credit Ratings said on Wednesday.
The delinquency rate for securitized debt, or commercial mortgage-backed securities (CMBS), fell throughout the second half of 2017 and should continue to decline next year as the problematic pre-crisis loans are resolved, Morningstar said.
So-called “legacy” loans taken out in 2007 or before, when underwriting standards were less conservative, have accounted for more than 90 percent of all delinquencies in recent months but less than 6 percent of outstanding CMBS debt in November.
The outlook for CMBS in 2018 is positive and commercial real estate in general is expected to do well, said Steve Jellinek, a CMBS research analyst at Morningstar who authored the delinquency report.
“We foresee pretty steady performance,” Jellinek said in an interview this month. “Interest rates are low, there seems to be a decent amount of liquidity in the market and property values are holding up.”
Loans that back malls, many of which have shuttered because of the rise of e-commerce and over-building in retail, account for about $50 billion of outstanding CMBS debt and are less risky than loans underwritten before 2007, Jellinek said.
The universe of CMBS debt was $822.9 billion as of November.
However, the volume of newly delinquent loans shot up to more than $1.8 billion after falling below $1 billion in October for the first time in more than three years, the report said.
Five large loans with a balance of more than $1 billion, including four whose delinquency is due to a reporting error, should soon return to a non-delinquent status, Morningstar said.
The fifth loan - a $505.6 million Toys ‘R’ Us loan - appears to be a technical issue, Morningstar said.
“What has been most surprising is that borrowers with highly leveraged loans have successfully repaid them at their maturity dates,” Jellinek said.
This indicates lenders and investors do not anticipate property values declining significantly anytime soon, he said. (Reporting by Herbert Lash; Editing by Susan Thomas)