KBRA Credit Profile sees small decline in November

KCP's K-LOC designation identified 70 fewer loans as being either at risk of or in default

KCP, a division of KBRA Analytics, tracked a small but notable shift in its monthly KBRA Loan of Concern (K-LOC) Index. The index, which measures loans of concern in commercial mortgage-backed securities deals, dropped from 17.68 percent in October to 17.40 percent in November. In comparison, the index was at 25.21 percent in November 2021.

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 17.40 percent seen in November represents the quotient of K-LOCs by unpaid principal balance (UPB) and the combined UPB of KCP’s conduit coverage universe.

In November, KCP removed the K-LOC designation from 117 loans totaling $2.22 billion. This included 51 lodging loans totaling $1.22 billion and 28 retail loans comprising $374.4 million. At the same time, KCP identified 47 new loans totaling $882.5 million as K-LOCs.

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, including valuations and principal loss forecasts. As of November 2022, KCP had identified a total of 2,593 K-LOCs across 426 conduit transactions, with an aggregate unpaid principal balance of $58.19 billion.

The lodging and retail sectors were the most severely impacted when covid-19 first emerged in the US. This contributed to a sharp increase in the K-LOC Index. While the long-term nature of office leases initially insulated the sector from the adverse impacts of the pandemic, the proportion of office K-LOCs has since increased as businesses re-evaluate space needs and implement hybrid work models.

As of November, 36.09 percent of K-LOCs are backed by retail properties, with office properties making up another 25.26 percent. Lodging loans made up 23.07 percent, while multifamily comprised just 3.71 percent. Across all vintages tracked, K-LOC balances fell by a net of $1.44 billion in November.

The Denver metropolitan statistical area has the highest index (29.91 percent) across the 20 largest MSAs, with loans representing nearly one-third of outstanding CMBS debt in that market identified as K-LOCs. The market also has the highest concentration of distressed office collateral, reflecting a vacancy rate of more than 20 percent. Additionally, sublease availability hit record levels of more than five million square feet in 2022. The 20 largest MSAs comprised nearly two-thirds of all of conduit debt.