K-LOC Index: KBRA Credit Profile tracks a slight dip in January

While there has been recovery in the retail and lodging sectors, challenges remain.

KBRA Credit Profile, a division of KBRA Analytics, saw a slight decline in its monthly KBRA Loan of Concern (K-LOC) Index. The index, which tracks loans of concern in commercial mortgage-backed securities deals, stood at 17.47 percent in January, compared with 17.52 percent in December 2022 and 23.84 percent in January 2022.

The K-LOC designation serves as KBRA’s primary metric to identify loans that are in default or at heightened risk of default based on KCP analysis. The level of 17.47 percent recorded in January represents the quotient of K-LOCs by unpaid principal balance (UPB) and the combined UPB of KCP’s conduit coverage universe. KCP removed the K-LOC designation from 101 loans totaling $1.69 billion in January, including 43 lodging loans worth $895 million. KCP identified 80 new loans totaling $1.6 billion as K-LOCS in its January report.

KBRA’s KCP platform is a subscription-based surveillance service that tracks more than 1,250 commercial real estate securitizations, with monthly analysis on these transactions and the underlying loans. As of January, KCP had identified a total of 2,545 K-LOCs across 429 conduit transactions, with an aggregate unpaid principal balance of $58.02 billion.

The pace and magnitude of K-LOC identifications is expected to pick up, despite the month-over-month K-LOC Index drop, due to accelerated CMBS loan maturities, heightened interest rates and inflationary pressure. The lodging, retail and office sectors remain challenged despite some recovery in retail and lodging. Hybrid work models and re-evaluated workspace needs have increased the proportion of office K-LOCs and KCP anticipates higher levels of volatility will persist in the sector.

KCP and Trepp data show CMBX K-LOC Indexes have generally trended with the benchmark index over the trailing 24-month span ending January 2023. Recent increases in the CMBX 6 and CMBX 7 indices reflect a higher K-LOC concentration as new loans are identified as K-LOCs and performing loans reach maturity and are paid off.

As of January this year, 35.79 percent of K-LOCs were backed by retail assets followed by office properties at 27.23 percent. Lodging loans represented 20.49 percent of K-LOCs and multifamily remained the lowest-totaling category at 4.03 percent. Across all tracked vintages, K-LOC balances dropped by an estimated net of $170 million between December 2022 and January 2023.

While the Chicago metropolitan statistical area clocked the highest index (30.11 percent) across the 20 largest MSAs in January 2023, the Downtown Los Angeles submarket presented an interesting CMBS situation in February when a fund managed by Brookfield Properties defaulted on $784 million of loans on the Gas Company Tower and 777 Tower. The Brookfield DTLA Fund Office Trust Investor owns and manages six office properties within its wider portfolio. Three of the six office assets serve as collateral in various CMBS transactions, and KCP identified the associated loans as K-LOCs in the January 2023 report.