The commercial property securitization market is expected to exceed 2021 production levels as rising employment rates in particular help support a more positive economic outlook, according to ratings agency Kroll Bond.
Private label commercial real estate (CRE) securitizations could reach $149 billion, more than double the 2020 volume of $62.2 billion. Next year, KBRA projects year-end volume between $150 billion and $165 billion.
The ratings agency’s Nov. 23 forecast, 2022 Sector Outlook –CMBS: Full Steam Ahead, is particularly positive given that the commercial real estate transaction output market of 2021 outpaced that of 2020. commercial mortgages, particularly conduits and single borrowers/large loans, are expected to end this year with $105 billion in issuance, a level not seen in 14 years, according to the report.
Conduit issuance could increase significantly, although the increase will be on a fairly small basis, the agency said. The average loan-to-value ratio of KBRA (KLTV) has risen to 98.2% year-to-date from 95% in 2020, the agency said. The KBRA Interest Only Index stands at 75.8% so far in 2021, surpassing the 70% threshold. KBRA sees potential for increased leverage in the future.
Obligations secured by commercial real estate loans (CLOs) are expected to have a record year this year and exceed annual conduit volume for the first time. For 2022, KBRA forecasts a repeat performance of continued growth that will outpace conduits, according to the report.
Despite the positive expectations regarding the production of transactions, KBRA had several caveats, particularly regarding the real estate sub-sectors. Office CMBS offerings could weaken in 2022 and beyond, due to “hybrid working” or people who may work primarily from home, which could continue to dampen demand for office space.
Additionally, hotels and non-essential commercial properties are trending lower, with retail sales down 15.4% year-to-date in 2021 from 17.5% in 2019 and 24, 4% in 2018, KBRA said. Accommodation over the same period fell from 10.3% to 3.6%.
Several real estate sub-sectors should do well this year. KBRA expects healthy volumes for industrial and multi-family. They are expected to remain the main types of assets financed primarily by variable rate debt, according to the report.
Multi-family CRE CLO exposure, which has increased to 60% this year from 50% in previous years, is expected to remain high. Ninety-three percent of households paid partial or full rent in October, KBRA said.
In the industrial segment, demand for space exceeded new supply. E-commerce and third-party demand for logistics space has increased due to the popularity of online sales these days. KBRA expects the industrial market to do well as supply chain and transportation delays during the pandemic have created an increase in business inventories. Construction is unlikely to keep up with demand, KBRA said, leading to lower vacancy rates and higher rents.
Commercial real estate securities (CREs) rated by KBRA have mostly retained their AAA and A category classes (97%), but the agency has downgraded 585 ratings out of 116 transactions since the start of the pandemic in October, which hit 11% of CRE ratings before the pandemic hit in March 2020.