Economist Joseph Schumpeter developed the "creative destruction" thesis in the 1950s. This is the economic theory telling the "out with the old and in with the new" story. Creative destruction is necessary as society adapts to cultural or other changes. It is clear America's changing commercial property culture and habits are coming home to roost in the massive CMBS book.
The delinquency in the CMBS book has clearly picked up. No surprise given the pandemic-enabled cultural shift in:
How people interact with city centers and
People's desire to decouple "work" from "place."
The markets with significant credit impairment have some concentration across property types. Keep an eye on the markets with 2 or more property types under stress. Here are a few things to watch:
The watch list is building. These are loans that are not yet impaired but are moving in that direction.
Special servicers are those companies that work out defaulted or are likely-to-default loans or investments. Special servicers are often smaller, cost-conscious companies with older systems. The ability to quickly scale could be problematic. Don't forget the powerful lessons from the great financial crisis. Consumer mortgage default management faced the same, high-impact scaling challenge.
Investors are picking up properties out of REO and distressed situations. The silver lining could be converting office and retail to apartments, condos, etc. Adding single-family supply should help alleviate affordable housing pressure.
In positive economic news, inflation appears to be retreating. This gives the Fed room to reduce interest rates. Lower interest rates help commercial investors manage cap rate compression. While this may not stem the tide of high vacancy rates, it should investors buy a little time to make a more thoughtful investment transition.
The data is not perfect, but I have been able to cross-confirm with other data and sanity checks. I'm sure our commercial property perspective will build over the coming months.
