Rating agencies see a bumpy CMBS ride for 2022 and 2023

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Escalating economic turmoil will likely make it more difficult to redeem commercial mortgage-backed securities (CMBS) later in 2022 and 2023, leading industry analysts to downgrade their outlook for half of the sectors CMBSs.
Fitch Ratings recently downgraded its outlook to “neutral” from “improving” for the hotel, industrial and multi-family CMBS sectors by downgrading all of the US CMBS sectors it rates, including office and retail, to “neutral.” . This decision was prompted by the fact that Fitch reduced its forecast for GDP growth for 2022 to 2.9% from 3.5%, taking into account the increase in interest rates to counter inflation, which the rating agency expects an average of 7.8% in 2022, compared to 6.9% last year.

“Stagflation is not our base case, but we expect GDP growth to slow to 1.5% in 2023,” Fitch said in a July 14 report.

Fitch and DBRS | Morningstar only provides its view of a large CMBS space. As of June 30, the commercial real estate sector had valued $58.6 billion in CMBS since January, with JP Morgan Securities leading the delivery pack, with $11.3 billion in transactions, according to data from SourceMedia. , a predecessor company of Arizent.

Analysts anticipate economic challenges and highlighted them in a July 13 DBRS | Morningstar report, which notes a “modest increase” in the CMBS reimbursement rate for 2022 from pandemic lows, followed by declines to come. The repayment rate increased significantly to 78.1% in the first four months of the year on $4 billion of maturing CMBS. However, for the $22.5 billion expected to mature throughout the year, DBRS expects the rate to fall to 70% in its baseline scenario and drop to the low 60% range in 2023.

The redemption rate of CMBS maturities reached nearly 80% in 2019 before falling to 48.6% in 2020 and regaining ground to 58.5% in 2021.

Post-pandemic hotel recovery was strong in the first half of 2022, Fitch says, but high travel costs, reduced flights and rising labor costs and shortages have ‘tempered’ expectations of the rating agency in terms of cash flow recovery. While performance has returned to pre-pandemic levels for leisure-oriented hotels, the recovery of urban properties heavily reliant on business travel continues to lag, potentially exacerbated by a new surge of COVID- 19 or persistent inflation, or both.

On the multifamily front, Fitch says, higher mortgage rates and high single-family home prices have kept many potential first-time home buyers as renters.

“However, with incomes generally unable to keep pace with inflation, as well as selective hiring and layoff freezes in the tech sector, growth in multifamily rents is under pressure, particularly in larger urban markets. multifamily,” Fitch said.

The rating agency says the industrial real estate sector remains strong in 2021, with leases expiring at market rates, but adds that currently high prices require strong rental growth which could be disrupted by macroeconomic headwinds.

As for the office and retail sectors, Fitch had already rated them “neutral” before publishing the report, and this outlook remains unchanged.

DBRS based its earnings forecast on its base case and notes that under its stressed scenario, earnings rates could drop to 50% for 2022 and 40% next year.

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