The commercial real estate securitization market should top 2021 production levels, as rising employment rates in particular help support a more positive economic outlook, according to Kroll Bond Rating Agency.
Private label commercial real estate (CRE) securitizations may end up at $149 billion - more than double 2020’s volume of $62.2 billion. Next year, KBRA projects the year-end volume between $150 billion and $165 billion.
The rating agency’s November 23 forecast, 2022 Sector Outlook --CMBS: Full Steam Ahead, is particularly positive considering that the 2021’s commercial real estate transaction output market topped 2020’s. Commercial mortgage backed securities, specifically conduits and single borrowers/large loans, are forecast to end this year with $105 billion in issuances, a level not seen in 14 years, the report said.
Conduit issuance may increase substantially, although the increase will be off a fairly low base, the agency said. The average conduit KBRA loan-to-value (KLTV) increased to 98.2% year-to-date from 95% in 2020, the agency said. The KBRA Interest Only Index stands at 75.8% so far in 2021, breaking the 70% threshold. KBRA sees potential for increased leverage in the future.
Commercial real estate collateralized loan obligations (CLOs) are expected to have a record year this year and for the first time surpass conduit annual volume. For 2022, KBRA forecasts a repeat performance of continued growth that will exceed conduits, the report said.
Despite the positive expectations for deal production, KBRA had several caveats, particularly concerning property sub-sectors. Office CMBS deals may weaken in 2022 and into the future, due to “hybrid work” or people who may work from home predominantly, potentially continuting to curb demand for office space.
In addition, hotel and nonessential retail properties have declining conduit trends, with retail down to 15.4% year-to-date in 2021 versus 17.5% in 2019 and 24.4% in 2018, KBRA said. Lodging during that same period dropped from 10.3% to 3.6%.
Several property subsectors are expected to fare well this year. KBRA expects healthy volumes for industrial and multifamily. They should remain the key property types financed predominantly with floating rate debt, the report said.
Multifamily CRE CLO exposure, which increased to 60% this year from 50% in earlier years, is expected to stay high. Ninety-three percent of households made partial or full rental payments in October, KBRA said.
In the industrial segment, the demand for space outpaced the new supply. E-commerce and third-party demand for logistic space increased because of how poppular online sales are these days. KBRA expects the industrial market to do well because supply chain and transportation delays during the pandemic created increases in business inventory. Construction is unlikely to keep up with the demand, KBRA said, resulting in lower vacancy rates and higher rents.
The KBRA-rated commercial real estate (CRE) securities mostly maintained their AAA and A category classes (97%), but the agency downgraded 585 ratings across 116 transactions since the pandemic began though October, which impacted 11% of the CRE ratings before the pandemic hit in March 2020.
