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Benchmark CMBS deal reflects changing pool dynamics

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As the ongoing pandemic raises major questions over the fate of commercial real estate, the Benchmark 2020-B20 Mortgage Trust deal approaching the market has as a significantly higher concentration of office properties.

Workers adapting to working remotely has raised questions about the extent to which companies will rely on offices post-pandemic, while hotel and retail properties face significant immediate challenges. In a signal that at least some industries foresee a return to the office environment, the New York Times reported Oct. 13 that big tech companies, including Google and Amazon, have recently leased or purchased significant office space in New York City.

Google’s Moffet Place campus in Sunnyvale, CA, which totals 701,000 square feet and is fully leased to Google, provides the largest loan in the commercial mortgage backed security (CMBS), making up 8.3%. Northern Trust Office is next at 4.5% of the pool, followed by Coleman Highline, fully leased to Roku, Inc., at 4.4%.

In an Oct. 13 pre-sale report, Fitch Ratings compares the current Benchmark deal to its predecessor completed in September as well as CMBS deals year to date (YTD) and in 2019. While the pool balance of $903 million is comparable to deals in those categories, its 34 loans is significantly less than the 40 in the September Benchmark deal, and the 45 YTD average and 2019’s average of 50.

Fitch’s Ryan Frank, senior director, structured finance—CMBS, said the ratings agency has generally seen the average deal size of CMBS lessen since the onset of the pandemic, at $878.1 comprising 45 loans so far in 2020, compared $926.2 million and 50 loans in 2019. As a result, the top 10 loans so far in 2020 average 55.9% of total deal balances compared to 51.0% last year.

“Following the reopening of the CMBS market in summer 2020, issuers have significantly reduced the number of loans collateralized by hotel and retail properties, thereby limiting overall deal sizes,” Frank said.

The $992 million September deal comprising11 tranches priced at coupons ranging from 0.63% to 2.00% and, according to Finsight, had four join leads: Citi, Deutsche Bank Securities, Goldman Sachs Group, and J.P. Morgan Securities.

Given the coronavirus’s impact on commercial real estate, Fitch’s outlook on the CMBS sector is negative. The agency says that the ongoing virus containment effort, including bad debt expense and rent relief, may have an adverse impact on near-term revenue for some pool properties, and delinquencies may occur as forbearance programs are put in place. The impact on credit losses, it adds, will depend on the length and impact of the pandemic, and the extent to which federal government intervention mitigate the impact on consumers.

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