Moody’s Investors Service predicts that, within the space of commercial mortgage backed securities, rising interest rates next year will heighten both the term risk of new deals and the refinance risk of outstanding ones.
But ratings should remain the same.
In a report released Monday, the agency said that while increasing long-term interest rates typically goes hand-in-hand with rising rental income, there can be a delay. In addition, higher rates nationwide do not necessarily translate into higher rents everywhere. “The property market response is distinctly local and can lag in metro areas that do not have a healthy supply/demand balance,” the agency said.
In addition, major CMBS sectors still exhibit excess inventory — this must be re-absorbed into the market before rents can rise.
Moody’s forecasts that rates will have gone up by 2016, which is around the time that 10-year deals that came out during the peak years of 2006-07 will be maturing.
The agency also pointed out that the quality of collateral in commercial mortgage-backed securities (CMBS) has deteriorated over the last year, although it is nowhere near the level hit during the issuance boom of 2007. (See table below). The agency projects that by the end of 2013, its measure of loan-to-value ratio will be 103%. This is up from 98% at the start of year, but well below the peak level of 118%.
At any rate, Moody’s expects that ratings of CMBS will be stable in 2014, thanks to relatively conservative underwriting and high debt-service coverage levels that have been in place since the crisis as well as to a recovering economy. “Affirmations will constitute most of our ratings actions, with the remainder roughly evenly divided between upgrades and downgrades,” the agency said.
It forecasts a slight fall in the share of delinquent and specially serviced deals.