KBRA sees bottoming out for commercial real estate market

The New York-based rating agency is also forecasting a rebound in commercial mortgage-backed securities issuance in 2024.

KBRA believes the commercial real estate market is close to bottoming out, with analysts at the New York-based rating agency anticipating an uptick in sales or refinancing activity in the coming year.  

As a result, the agency is projecting a 24 percent increase in commercial mortgage-backed securities volume. KBRA’s forecasts around CMBS are in line with similar forecasts from the Mortgage Bankers Association around lending and the Urban Land Institute around transaction activity, said Nitin Bhasin, senior managing director and global head of CMBS ratings at KBRA.   

“As more sales and price discovery happens, there will be more stability in commercial real estate and lending and securitization volumes will progress,” Bhasin said. “While there will be  a rise in volume, the total number will be low. But it is an important bottoming out and next year will help clear the cloudiness and lead to a stronger 2025 and beyond.”   

Eric Thompson, a senior managing director at KBRA, said the dip in CMBS issuance and transaction activity was anticipated given the Federal Reserve’s moves to increase interest rates over the past eighteen months. But the Federal Reserve is now taking a less hawkish stance.  

“The Federal Reserve has held rates steady for the last couple of meetings and we believe the increases are behind us, which will lead to an increase in issuance,” Thompson said. “However, we are also in the camp that rates will be higher for longer, and that will affect all structured finance issuance.”  

KBRA is expecting to see about $45 billion of private-label CMBS issuance total in 2023 (which includes CRE CLOs), a significant dip from the $156 billion seen in 2021 and the $100 billion completed last year. The agency is also projecting about $55 billion in issuance next year with modest increases expected in conduit, SASB and CRE CLO volumes, Bhasin said.

One meaningful area of activity for the market has come from five-year, fixed-rate conduit deals, with Bhasin estimating that about 40 percent of the conduit transactions completed this year fit that bill.   

“I think [five-year conduits] are here to stay for the near-term. There were always five-year bonds from 10-year deals, but these five-year deals are a new phenomenon. Initially, some issuers, investors and b-piece buyers weren’t convinced it could be an established product, but continued borrower and lender interest bodes well for the product into next year and beyond,” Bhasin said.  

On the performance front, Roy Chun, senior managing director, CMBS ratings surveillance at KBRA, noted most property types are holding steady, apart from the office sector. While vacancy rates for the sector grew to more than 19 percent this year, performance varies dramatically on an asset level, he added.   

“Not every office is bad and not every deal with office gets downgraded. With rent concessions increasing, the net effective rent is still negative trending. But projections are that it is bottoming out,” Chun added.