CoStar Projects $148 Billion in CMBS Loan Defaults Over Two Years

The coronavirus crisis is undeniably causing pain for many commercial property owners and lenders. However, for risk-taking investors, this could be a long-awaited opportunity to go bargain hunting.

Over the next two years, the market could expect to see 13,000 loans totaling $148 billion held in commercial mortgage-backed securities default, according to a new analysis by CoStar Risk Analytics. That represents 14% of the loan count and 11% of the dollar amount that currently make up the CMBS universe. Loans on multifamily properties lead the vast majority of projected defaults based on one scenario of significant economic decline.

Historical CoStar data shows that when a massive amount of distressed sales flood the market in a short time period, properties are liquidated at prices not only much lower than their outstanding loan balance, but also much lower than the market value of similar properties in the same location.

Using the Great Recession as an indicator, a large volume of projected defaults today could generate a surge in distressed property sales. The ratio of distressed property sales to total transactions reached a peak of 32% in 2010 before sliding down to 2% prior to the coronavirus outbreak, according to CoStar data.

“Looking at loan default forecasts driven by coronavirus pandemic economic downturn scenarios, if the distressed transaction rate continues to coincide with the default rate, we would expect to see a wave of distressed sales over the next couple of years,” said Xiaojing Li, managing director of CoStar Risk Analytics. “That swings the doors wide open for opportunistic investors.”

Once defaulted loans are liquidated, the properties backing them could sell at an average of one-third of their pre-coronavirus value, based on CoStar Risk Analytics’ COVID-19 scenario, which is similar in severity to the Great Recession. The scenario projects a price decrease of 66%, which is more than three times the size of a 19% drop for properties sold backing loans that avoid default. READ MORE