Escalating economic troubles are likely to make repayment of commercial mortgage-backed securities more difficult later in 2022 and in 2023, leading industry analysts to lower their outlooks for half of the CMBS sectors.
Fitch Ratings recently lowered its outlooks to ‘neutral’ from ‘improving’ for the hotel, industrial and multifamily CMBS sectors in the bringing all U.S. CMBS sectors it rates, including office and retail, to ‘neutral’. The move was driven by Fitch cutting its 2022 GDP growth forecast to 2.9% from 3.5% considering higher interest rates to counter inflation, which the rating agency anticipates averaging 7.8% in 2022, up from 6.9% last year.
“Stagflation is not our base case scenario, but we are forecasting GDP growth to slow to 1.5% in 2023,” Fitch says in a July 14 report.
Fitch and DBRS | Morningstar are providing just their view of a vast CMBS space. As of June 30, the commercial real estate industry had priced $58.6 billion in CMBS since January, with JP Morgan Securities leading the bookrunner pack, with $11.3 billion in deals, according to data from SourceMedia, an Arizent predecessor company.
Analysts anticipate economic challenges, and highlighted them in a July 13 DBRS | Morningstar report, which notes a “modest rise” in the CMBS payoff rate for 2022 from pandemic lows, followed by drops ahead. The payoff rate rose significantly to 78.1% in the first four months of the year on $4 billion of maturing CMBS. For the $22.5 billion expected to mature throughout the year, however, DBRS anticipates the rate falling to 70% under its baseline scenario, and dropping to the low 60% range in 2023.
The CMBS maturity payoff rate reached nearly 80% in 2019 before falling to a low of 48.6% in 2020 and regaining ground again, to 58.5% in 2021.
The post-pandemic recovery of hotels was strong in the first half of 2022, Fitch says, but high travel costs, reduced flights and increased labor costs and shortages have “tempered” the rating agency’s cashflow recovery expectations. While performance has returned to pre-pandemic levels for leisure-oriented hotels, the recovery of urban establishments relying heavily on business travel continues to lag, potentially exacerbated by another COVID-19 surge or persistent inflation, or both.
On the multifamily front, Fitch says, higher mortgage rates and high prices for single-family housing kept many potential first-time homebuyers as renters.
“However, with incomes generally failing to keep pace with inflation, as well as selective hiring freezes and layoffs in the tech sector, multifamily rent growth is pressured, particularly in large urban multifamily markets,” Fitch says.
The rating agency says the industrial property sector remains strong in 2021 from expiring leases rolling up to market rates, but it adds that the currently high prices require sustaining strong rent growth that could be disrupted by macroeconomic headwinds.
As for the office and retail sectors, Fitch had already rated them ‘neutral’ before it published the report, and those outlooks remain unchanged.
DBRS based its payoff forecasts on its baseline scenario, and it notes that under its stressed scenario payoff rates could plummet to 50% for 2022 and 40% next year.
