KBRA sees steep drop in CMBS, commercial real estate CLO issuance in 2023

Despite headwinds around CMBS issuance, downgrade risks are not severe.

Kroll Bond Rating Agency is projecting a significant drop in commercial mortgage-backed securities and commercial real estate CLO issuance in 2023 due to the impact of rising interest rates.

The New York-based rating agency expects a total volume of $94.5 billion in private label issuance of 2022, with commercial mortgage-backed securities volume estimated at $71 billion and commercial real estate CLO issuance at $29 billion. For 2023, KBRA forecast the issuance to be meaningfully down to $71 billion, a 29 percent drop from 2022, with CMBS at $54 billion and commercial real estate CLOs at $17 billion.

The Federal Reserve’s plans for future rate increases will affect issuance. “If the pace of rate increases slows down and gets better, we would expect the volume to be backloaded in the second half of 2023,” said Eric Thompson, senior managing director of global structured finance at KBRA.

The headwinds around CMBS issuance in 2023, KBRA projects, will also impact the performance of outstanding loans. The report discussed seeing more loans transferring to special servicing as their maturity dates approach, which might lead to negative rating drifts on certain transactions.

However, KBRA does not expect a significant increase in the number and severity and downgrades. CMBS delinquencies, which have been on a steady decline since peaking in June 2020 at 10.32 percent, may currently be near a bottom at 2.96 percent, the report stated.

“Commercial property has been very resilient for the most part, except for office,” Thompson noted. “The hybrid work patterns have been major factors in the performance of the sector. It remains to be seen if the current hybrid work arrangement is going to be secular or if it’s temporary.”

KBRA also reviewed loan-to-value ratios, with the report noting the average conduit has reached its lowest level of leverage since 2013. The report found the All-In Cutoff KBRA Loan to Value (KLTV) falling to 102.8 percent year-to-date in 2022 from 105.7 percent in 2021. The total amount of subordinate debt in CMBS dropped to 23.7 percent, a decline from the high of 41.6 percent in 2020.

One additional concern is that, with the weighted average coupons on recent conduit securitizations approaching 6 percent – compared with an average of 4.5 percent for 2013 and 2014 maturing loans – KBRA is expecting loans to face a challenging refinancing environment.