S&P Global Ratings estimates that commercial mortgage-backed securities volume will increase significantly over 2020 levels, as CMBS delinquency levels have declined from peak levels and COVID-19 vaccination rollouts spur hopes of more normalized economic activity.
However, certain pockets of distress will remain in place.
S&P projects volume of $70 billion in 2021, compared to the 2020 final deal tally of $53 billion that was a 45% year-over-year decline from 2019.
The projection came in a report issued Tuesday by the ratings agency that provided details on fourth-quarter CMBS activity involving eight new-issue transactions.
Those new CMBS deals in the last three months of the year had somewhat weaker loan collateral, according to S&P, with higher leverage and historically high levels of full- and partial interest-only loans that carried over from the third quarter.
As a result of the greater portion of interest-only loans and low market interest rates, debt service coverage remains historically elevated at 2.35x.
S&P rated three of the eight U.S. CMBS conduit transactions that priced in the fourth quarter. The eight deals had an average of 41 loans, with top 10 loan concentration averages of 60% about 10 percentage points higher than the first quarter average, according to S&P.
Average deal size was $839 million, up from $775 million in the third quarter. The loan-to-value ratio was 99%, higher than averages in the past five years.
Property types shifted signficantly, as retail and lodging property types returned to portfolios following pandemic's impact on such assets collateralized in second-quarter deals. Retail property exposure increased to 17% from 9%, Lodging properties increased “modestly” to 9% from 8% in the third quarter and just 2% in the second quarter.
While industrial properties were at 11%, down from the third quarter (12%) but “well above” 5% in the second quarter.
Office-property exposure rose to 43% from 39%, reaching nearly a four-year high behind the 46% figure recorded in the first quarter 2017, according to S&P.
Multifamily exposure dropping to 6% from 16% in the third quarter and 22% in the second quarter.
The CMBS quarterly report came a few weeks after S&P issued a full-year outlook on commercial real estate, in which it projected continued stresses in the luxury, full-service hotel sector and multifamily market due to the ongoing economic impact of COVID-19.
In the hotel/hospitality sector, existing revenue-per-average-room rates are expected to stay at sharply declined levels from 2019, and will likely not rebound until 2023, S&P warned. But certain hotel property types such as limited-service and extended-stay hotels are expected to outperform full-service hotels securitized in CMBS portfolios.
Meanwhile grocery-anchored retail, home improvement and larger big-box retailers will outperform traditional retail stores; S&P expects retail mall performance deterioration “to continue or accelerate” over the next year.
The office-property sector will have mounting pressures from corporate cost-cutting and long-term work-from-home trends that will reduce demand — particularly in central business districts in major cities.
“We expect more clarity as the year progresses and with the reentry of workers to their offices. Also, office leases are typically for longer terms (10 or more years, on average), therefore any potential market distress would likely take place over an extended period.” the report stated.
Rents have dropped in many large cities for apartment buildings, as multifamily demand fell by more than 6% since March and is still falling at a rate of approximately 1% each month, S&P’s report noted. “[Tenant] concessions have also been increasing, especially at newer properties that are struggling to lease up to a stabilized level.”
