CMBS Market Closes 2019 On Strong Note

The commercial mortgage-backed securities market closed 2019 on a strong note, analysts reported.

“After a year of global economic worries including talks of a possible U.S. recession, the progression–or lack thereof–surrounding trade issues, and a surge in overall market tension, CMBS held its ground,” said Manus Clancy, Senior Managing Director with Trepp LLC, New York. “December data revealed that the CMBS market was steady with lending and issuance continuing at a modest rate despite the holiday season and the delinquency rate maintaining its figure from the month prior.”

Clancy noted December’s CMBS delinquency rate held steady at 2.34 percent, down 77 basis points year over year. “The [delinquency] rate started to fall after June 2017,” he said. “Since then, the rate has fallen in 25 of the last 30 months.”

The CMBS delinquency rate peaked at 10.34 percent in July 2012.

Fitch Ratings, New York, said term delinquencies have remained low since the inception of CMBS 2.0 after the 2008 financial crisis; CMBS 2.0 delinquencies currently equal just 61 basis points. “As interest rates are low with the early CMBS 2.0 loans reaching the end of their ten-year term, maturity defaults will likely remain low as well, at least for the near term, although Fitch is closely monitoring several retail malls’ ability to refinance,” Fitch’s monthly Market Trends report said.

CMBS issuance approached $100 billion in 2019; the highest volume since the financial crisis. S&P Global Ratings said it expects CMBS private label new issuance volume excluding commercial real estate CLOs could reach $100 billion this year amid “stable” credit performance.

Looking forward, with many CMBS loans tied to the benchmark London Interbank Offered Rate, which is scheduled to expire in December 2021, Kroll Bond Rating Agency examined 96 securitizations with bonds or loans indexed to the LIBOR. With an aggregate unpaid balance of $41.3 billion, the deals were generally floating-rate single-asset single-borrower transactions and CRE collateralized loan obligations with some other exposure areas including single-family rental securitizations, small-balance commercial and Freddie Mac floating-rate transactions.

KBRA said its operating assumption will remain the same after the transition from the LIBOR to its presumed replacement, the Secured Overnight Financing Rate: “Namely, floating-rate transactions are generally ratable and we do not expect to engage in widespread rating actions or ‘watch’ placements due to the cessation of LIBOR,” the ratings firm’s Transitioning Away From LIBOR report said. “That said, there are a number of hurdles related to the adoption of a replacement rate, including operational challenges, which could prompt rating actions on individual transactions.”