Kroll Bond Rating headquarters in Midtown Manhattan

NEW YORK CITY—CMBS issuance began 2017 at a sluggish pace, but may now finish out the year with total issuance close to or exceeding $90 billion, says Kroll Bond Rating Agency. However, KBRA's outlook report for next year sees cooler temperatures in the forecast.

While acknowledging that it was difficult not to be influenced by the recent environment for new issuance, KBRA senior director Larry Kay says the rating agency expects private-label CMBS issues to taper to about $65 billion, in line with the historical mean. “We expect that single borrower issuance will remain in line with '17, but conduit issuance may fall as much as 30%,” Kay says.

Moreover, single-borrower deals in 2018 may come with increased leverage, judging by recently priced deals. This is especially true in securitizations backed by office properties; Kay notes that of the 17 single-borrower New York City office deals that KBRA rated between 2012 and 2016, only three had KBRA loan-to-values greater than 100%. In 2017, on the other hand, KTLVs exceeded 100% on five of the seven NYC office transactions KBRA has rated this year.

In the coming year, KBRA reports, “it doesn't appear that existing CMBS maturities will play as much of a role as they have in the past. As we exit from the feared maturity wall relatively unscathed, there is only $23 billion of scheduled, non-defeased CMBS maturities slated for next year,” a drop of 70% from the $89 billion scheduled to mature over the course of the current year. The picture doesn't improve much in 2019, with just $22 billion of loans scheduled to mature.

“However, capital flows into the CRE sector remain healthy,” according to KBRA. Although preliminary numbers by CoStar Group show that US sales volume was down by over 13.0% year-over-year as of the third quarter, “it is important to note that 2016 volume was the second strongest year on record.”

KBRA sees the pace and extent of the Federal Reserve's unwinding of its balance sheet as a potential wild card for next year. In addition to domestic interest rate sensitivity, “the market will have to deal with global concerns including a possible hard economic landing by China, as well as geopolitical tensions surrounding North Korea's nuclear weapons program,” according to KBRA.

Beyond these macro issues, KBRA also weighed a number of other potential influencers as either positive or negative for CMBS issuance in '18. On the positive side, the still-strong capital flows into commercial real real estate should support “modest price growth.”

The ratings agency also notes that a recent survey on institutional real estate allocations reports that CRE investments will be going up over the next 12 months. Within the CMBS realm, “delinquencies are low and credit performance remains stable,” although more incidents of underperforming loans are being observed. And let's not forget that even with the Fed moving toward incremental increases in the federal funds rate, “interest rates are still at historically low levels.”

On the negative side, KBRA notes that CRE valuations have surpassed the prior peaks for all sectors but office, which is now within 1.8% of its 2007 peak. At the same time, property fundamentals are trending toward slower rent and price growth, while supply concerns are mounting, particularly in the multifamily and lodging sectors

There's also a slowdown in employment growth, which could curtail tenant demand, KBRA says. Lower refinancing and acquisition activity may be in the forecast for next year. Last but certainly not least, as GlobeSt.com recently reported, the Mortgage Bankers Association has forecast that commercial and multifamily originations will be flat in '18.

Instant Insights /

Cooler Temperatures in the Forecast for CMBS

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