KBRA Identifies $684M in Oil-Exposed CMBS Loans of Concern
After 18 months of falling oil prices, the downturn’s ripple effect spilled over into energy-related commercial mortgage-backed securities loans, said Kroll Bond Rating Agency, New York.
KBRA identified $684 million in CMBS 2.0 oil-exposed “loans of concern,” either in default or at heightened risk of default, with $165 million of those loans currently with a special servicer. The ratings firm put three transactions on its Watch Downgrade list last week due to loss estimates on oil-related loans of concern.
“Oil-related economies and companies have been contracting, thereby reducing demand for workers and investments in oil exploration and production,” KBRA said in a special report. “Most affected have been those areas with a high concentration of workers in energy-related jobs.”
Energy-centric markets North Dakota and Texas have the most oil-exposed loans of concern, KBRA said, noting that the multifamily and lodging sectors have been hit hardest because their short-term leases adjust to downturns much more quickly than other major property types. Apartment properties typically operate with one-year leases, while lodging room rates can change daily.
KBRA said individual loan of concern losses could run as high as 87.9 percent and 56.1 percent respectively for these two property types. In total, the loss severity equals 71 percent for multifamily and 37.7 percent for lodging.
In one of the most-affected markets, Williston, N.D., apartment asking rents declined from more than $2,000 to $1,500 year-over-year, CoStar reported. And MPF Research, Dallas, said apartment lease applications dropped 3.5 percent in Houston between November 2015 and January 2016 compared to the same period a year earlier. The number of lease renewals declined 4.9 percent over the same period.
“On the heels of plummeting oil prices, job growth in Houston slowed dramatically in 2015 and is expected to remain limited in 2016,” said MPF Director of Analytics Jay Parsons.
Parsons said the impact remains primarily isolated to Houston’s urban core and Energy Corridor, where energy firms employ thousands and where new apartment development approaches record levels. By comparison, most suburban submarkets showed strong fundamentals, especially in the eastern portion of the metro near the ports.
“Houston’s core submarkets are getting hit hard by the double whammy of near-record supply levels arriving at the same time high-income energy jobs are disappearing,” Parsons said. “Developers banked on those jobs to help support this supply wave, and their absence means we’ll see prolonged lease-ups and a very competitive leasing environment for a limited pool of Class A renters.”
MPF Research’s long-term forecast for Houston assumes continued weakness through the first half of 2017. “After that point, assuming some improvement in the energy sector, the market could be positioned for a quick rebound due to an expected plunge in new supply,” Parsons said. “Few new projects are breaking ground, which means little new supply will be arriving in late 2017 and in 2018.”
