Standard & Poor’s has joined the chorus warning of deeper risks in conduit CMBS issued this year compared with 2012-and-earlier vintages.
“Underwriting standards are slipping,” the agency said in a release today.
As ASR pointed out in a recent feature article, increased leverage, higher prevalence of interest-only (IO) loans and unreasonable expectations of increases in future rental income are among the leading indicators of this deterioration.
But S&P detects another source of risk: the growing share of lodging collateral within CMBS pools. The agency has less confidence in the income reliability of this property type than others. “While retail concentrations have declined due to numerous single-borrower mall transactions, [lodging], which is facing challenges from the growth of online sales and increased competition could again appear in greater concentrations in conduit transactions during the second half of 2013,” S&P said.
The agency said lodging properties have already made up 16% of conduit CMBS issued so far this year, steadily increasing from 13% in 2012, 10% in 2011, and 3% in 2010. While hotels have performed well in the last few years, S&P considers them a riskier investment than other forms of real estate.