CMBS Market Ready for Hurricane Season After Escaping Last Year

(Bloomberg) -- The commercial mortgage-backed securities market is starting the hurricane season on firm footing after weathering a bruising one last year.

Thanks to insurance, most CMBS investors escaped unscathed from the havoc caused by hurricanes Harvey and Irma. Only a small percentage of the $45 billion of securitized commercial-mortgage loans in Houston and Florida defaulted after being struck by the massive storms, according to analysts at Morningstar Credit Ratings and S&P Global Ratings.

With the U.S. still recovering from possibly the worst storm season on record -- three of the costliest hurricanes ever struck within weeks, levying a financial toll of $265 billion -- investors are eyeing areas that may have been left more vulnerable as another round of hurricanes begin to rumble out of the eastern Atlantic Ocean.

CMBS Market Ready for Hurricane Season After Escaping Last Year

But so far, there hasn’t been a wave of defaults, according to Steve Jellinek, vice president at Morningstar Credit Ratings.

“Although there were a number of properties damaged and out of commission, most had flood insurance,” Jellinek said by phone. “That’s the overarching theme in CMBS. Most have flood insurance so we are seeing a small percentage of those loans that have actually ultimately defaulted.”

For example, major renovations were done to Cheeca Lodge & Spa in the Florida Keys and it reopened for business in March, six months after Hurricane Irma.

In fact, CMBS delinquency rates are at a post-crisis low of 2.24 percent as of April in part because underwriters have since tightened standards, according to Jellinek.

CMBS Market Ready for Hurricane Season After Escaping Last Year

Puerto Rico hasn’t been as lucky. A handful of loans in the U.S. territory that have been bundled into securities were transferred to a special debt servicer after Hurricane Maria, Dennis Sim, CMBS director at S&P Global Ratings, said in telephone interview.

Many of Puerto Rico’s commercial property loans came due in early 2018, which made it harder for the owners to refinance, he said.

©2018 Bloomberg L.P.