Coronavirus May Deliver Coup de Grace to Overrated Commercial Mortgage-Backed Securities (CMBS) | Wolf Street
The COVID-19 virus is going to have an especially severe impact on Commercial Mortgage Backed Securities (CMBS), bonds that are backed by mortgages on non-residential properties. According to data from DBRS Viewpoint, more than half of the mortgages in CMBS deals are on offices, hotels and retail buildings – three categories being especially hit hard by shelter-in-place orders.
If shelter-in-place restrictions are lifted quickly and everything got back to normal immediately thereafter, most of these properties would be able to continue servicing their mortgages. But if we are instead entering a new normal of increased telecommuting, reduced travel and more online shopping, thousands of office buildings, hotels and malls will default.
This potential default wave will first expose the folly of poorly structured, over-rated CMBS deals. On the ratings side, the reckoning began on March 20 when Standard and Poor’s downgraded (password required, but available for free) 60 bonds in 15 deals with concentrated retail exposure.