KBRA Releases Research ? 2024 CMBS Sector Outlook: Cloudy, With a Glimmer of Hope
KBRA releases its 2024 CMBS Sector Outlook, which highlights key credit trends from 2023 and forecasts U.S. CMBS issuance activity for the new year. The report reviews the current lending environment and property fundamentals, as well as factors that may affect overall property performance in 2024. The report also discusses year-to-date (YTD) KBRA-rated CMBS conduit trends and metrics, takes a closer look at 2023 ratings activity, and outlines ratings surveillance expectations for 2024.
Many market participants have stayed on the sidelines waiting for better real estate prices as the commercial real estate (CRE) market continues adjusting to higher rates. Nevertheless, with fewer transactions taking place, especially among the more distressed properties, price discovery persists, as it is difficult to meet buyer and seller price expectations.
KBRA projects that issuance will bounce back from 2023 lows with a 23.6% year-over-year (YoY) increase, as the quarter-over-quarter (QoQ) positive trend experienced much of this year will persist in 2024, with increasing growth anticipated for 2H 2024. This assumes a somewhat steady interest rate environment, along with our expectation for a generally rocky capital and CRE market in the near term that will begin to exhibit signs of stabilization as 2024 progresses. This will be the result of an increasing number of borrowers accepting the new rate environment and lower valuations, and no new significant CRE or macroeconomic surprises. Additionally, given performance pressure on existing loans, we could see increased loan pool sales and reemerged securitizations of distressed debt, which could add to issuance volume not reflected in our 2024 forecast.
Some key takeaways from the report include the following:
- For full-year 2023, we estimate that conduit and single borrower (SB) issuance volume will total $37.5 billion, down 46.4% from the prior year. CRE collateralized loan obligation (CLO) 2023 issuance volume is expected to be about $7 billion, falling 76.9% from 2022.
- We expect issuance volume into 2024 will follow the overall quarterly positive trend that developed in 2023, with higher levels in the second half as the Federal Reserve's tightening cycle nears or reaches its end and prices exhibit signs of stabilization.
- For 2024, we forecast private label CRE securitization of $55 billion for an increase of approximately 25% YoY from low 2023 issuance levels. Conduit issuance is expected to have the least growth of the transaction types in 2024, although in 2023, five-year fixed rate loan originations helped to support the segment, which we expect to continue into 2024. As of YTD 2023, there were nine conduit deals consisting of five-year fixed rate loans, and two more are expected by year-end, based on our current visibility.
- There is a significant volume of maturing loans coming due in 2024 and through 2030 ($2.6 trillion). In 2024, the largest amount of maturities are scheduled, which total approximately $500 billion. However, for the CMBS 10-year loan maturities, the weighted average coupon (WAC) at securitization for KBRA-rated deals was between 4% and 4.5%, with current conduit loans being originated close to 8%. Borrowers may find it less expensive to modify loans, pay expenses, and cover servicer fees rather than refinance at these levels.
- When reviewing conduit credit metrics, KBRA loan-to-value (KLTV) and KBRA debt service coverage (KDSC) stand out, as they are at their lowest levels since KBRA started tracking these metrics in 2012. The KBRA Interest-Only (IO) Index is at its highest level since 2012, while pool concentration by loan count has also become much more concentrated.
- While the demand for industrial and multifamily remains positive, there have been signs of softening prices. Office continues to struggle due to weak demand, space underutilization, and functional obsolescence. Lodging and retail are exhibiting favorable performance, with both gaining increasing exposure in CMBS deals.
- YTD, there were more rating downgrades in 2023 compared to 2022, reflecting the CMBS distress rate, which meaningfully increased during the year. Downgrades remain elevated and outpaced upgrades again this year.
Click here to view the report.
About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
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