Trepp Inc. is observing conflicting signals in the commercial mortgage-backed securities (CMBS) market as measures of distress move in different directions. The firm reported that the balance of private-label CMBS loans at least 30 days past due fell in June, declining by $3.49 billion, or 3.7%. Overall CMBS delinquencies dropped to $43.98 billion, representing 7.35% of the securitized loan universe tracked by Trepp.
At the same time, another key stress indicator moved higher. Trepp found that the volume of CMBS loans in special servicing climbed 1.72% during the month to $66.76 billion. The firm noted that loans are transferred to special servicing for a range of reasons, but such transfers generally serve as a warning sign that a borrower or property may be experiencing financial or operating pressure.
To better understand these seemingly opposing trends, Trepp examined individual large loans now in special servicing. Among the more prominent exposures is financing backed by the Aon Center, a major office asset in Chicago. Roughly $536 million of CMBS debt is secured by the 2.78 million-square-foot tower, making it one of the larger office loans on Trepp’s special-servicing roster.
Trepp reported that certain pieces of the Aon Center loan had already been transferred to special servicing in prior periods, so the property’s distress was not new to market participants. However, the loan appeared again in the latest transfer data because a $93 million loan piece moved into special servicing during the current reporting month, adding to the total volume associated with the asset.
The Aon Center itself is contending with material performance challenges. According to Trepp, the 54-year-old building was 66% occupied as of last September. Property cash flow is now roughly half of what had been projected in 2018, when the financing was originated. In addition, Trepp noted that the building’s current appraised value has fallen to about one quarter of its 2018 valuation, underscoring the severity of the repricing that has occurred at the asset level.
Together, the decline in overall CMBS delinquencies alongside a rise in special-servicing balances, as illustrated by the Aon Center loan, highlights the complexity of interpreting distress metrics in today’s market. While fewer loans are currently categorized as delinquent, more are entering intensive asset-management or workout processes, suggesting that underlying credit and value pressures remain pronounced in key segments of the CMBS universe.
