Dear Secretary Mnuchin and Chairman Powell,
We applaud the ongoing efforts of the Department of the Treasury and the Federal Reserve to stand-up lending facilities to stabilize the economy and provide liquidity to businesses severely impacted by this unprecedented pandemic. We write to express our concern about the looming crisis in commercial real estate adversely impacted by the COVID-19 pandemic, including the $540 billion
Commercial Mortgage-Backed Security (CMBS) market that, if left unchecked, may lead to a wave of foreclosures, exacerbating the current downturn in the U.S. economy and ultimately result in permanent job loss in multiple industries and communities across the country. We request the Federal Reserve devise a relief plan for these borrowers, who through no fault of their own, have experienced a significant drop in revenue on account of the COVID-19 pandemic and related governmental orders.
As you know, businesses of all types and sizes have experienced revenue declines and cash flow problems, making it difficult to meet monthly debt obligations. For many of these businesses, actions by Congress and other federal agencies have encouraged lenders to continue servicing loans while working with borrowers to provide forbearance plans. Unfortunately, for CMBS borrowers, the
rigidness of their service agreements constrains them from obtaining relief from their servicer, who is under obligation to maintain principal and interest payments to bondholders. Further, CMBS loan covenants typically prescribe taking on additional debt triggers recourse, negatively impacting the bond ratings of the CMBS trust. For these distressed borrowers, various federal response programs, including the Main Street Lending Program, do not fit their needs, and the servicers' limited contractual flexibility to modify loans.
As of May, the overall CMBS delinquency rate hit 7.15 percent, up from April's 2.29 percent, according to Trepp. The all-time high for CMBS delinquencies is recorded at 10.34 percent in July 2012. Due to COVID-19, we are witnessing the CMBS market accelerate towards delinquency at a much quicker rate than the 2008 financial crisis. What took years to progress towards historical delinquency rates, now comes in a couple months, with the possibility of June numbers surpassing the recorded all-time high. Some of the hardest-hit industries, such as lodging and retail, who already have delinquency rates of 19.13 percent and 10.14 percent respectively, drive these climbing CMBS delinquency rates.
Without a long-term relief plan in the face of an elongated crisis, CMBS borrowers could face a historic wave of foreclosures starting this fall, impacting local communities and destroying jobs for Americans across the country. Further, surrounding property values and state and local tax revenues will plummet, worsening the recession, and removing critical revenue from local communities. The challenges facing commercial real estate are not confined to the CMBS market. Many commercial properties with traditional financing continue to struggle due to the economic hardship created by the COVID-19 pandemic, despite the actions made to-date by Congress, the Administration, and individual lenders. Additional relief is necessary where actions thus far have failed to address the growing market challenges. We encourage the Federal Reserve and the Treasury to evaluate the challenges to the full commercial real estate ecosystem, as additional assistance is structured.
The Federal Reserve has the ability to bridge the gap through various facilities to help many businesses survive this economic disruption. We must focus on maximum continued employment through a facility that enables participation by multiple hard-hit industries. Without an inclusive program, we may see large sectors of certain industries never recover. We believe an opportunity exists for responsible federal government investment in the commercial real estate market to provide a pathway to stabilize affected properties, the local jobs and businesses they enable, and the neighborhoods they serve.
We request the Department of the Treasury and the Federal Reserve urgently consider targeted economic support to bridge the temporary liquidity deficiencies facing commercial real estate
borrowers created by this unforeseen crisis.