DALLAS—Property fundamentals are expected to remain positive in 2018, which should support underlying collateral performance. However, rental growth is exhibiting signs of deceleration, particularly in markets where excess supply has come on line, says a report by Kroll Bond Rating Agency Inc.

In addition, there are more incidences of problem loans. Year-to-date October 2017, Kroll identified 380 new KBRA Loans of Concern/K-LOCs compared to 203 (87% increase) during the same period in 2016.

“Loans of concern are loans that are either in default or at a heightened risk of default,” Larry Kay, senior director of Kroll Bond Rating Agency, tells GlobeSt.com. “The increasing number of K-LOCs may put downward pressure on some ratings.”

With fewer loan originations expected in 2018, Kroll Bond Rating Agency suspects it will create competition among originators. This could contribute to an increase in the number of interest-only loans and additional indebtedness held outside the trust, as well as weakening loan structural features and collateral quality.

Year-to-date October 2017, industrial's share of CMBS originations was 5.3%, down from 5.7% for fiscal year 2016 and in line with the average share since 2000. The industrial sector continues to benefit from the growth in e-commerce and the demand for warehouse distribution centers. Outside of office, industrial was the only other major property type to record a sales volume increase (6.1%) on a year-over-year September 2017 to 2016 comparison. In addition, according to the third quarter 2017 Mortgage Bankers Association quarterly survey of commercial/multifamily mortgage bankers originations, the industrial sector had a 20% increase in origination volume year-over-year ending third quarter 2017. With increased transaction and origination volume, as well as improving property fundamentals, more industrial properties are expected to go into CMBS.

Industrial completions increased by 9.2% year-over-year as of third quarter 2017. Although the overall sector's net absorption levels have increased each year since 2010, there was a 19.5% year-over-year decrease as of third quarter 2017, and a 2.9% further decrease is expected in 2018, according to the CoStar Group. Absorption rate gains were concentrated in distribution properties located in core markets such as Dallas/Fort Worth. Although fundamentals remain strong, increased speculative supply in the South and West regions in particular is expected to mute further rent and occupancy increases in the sector.

Lodging accounted for 15.1% of CMBS year-to-date October 2017 issuance, which is in line with 2016 (15.3%). Oversupply concerns and slowing RevPAR growth appears to have had little impact on lodging's CMBS contribution. Hospitality's allocation to CMBS issuance has remained in the double digits for the sixth year in a row. The lodging market continues to report positive RevPAR growth, albeit at a slower pace. According to Smith Travel Research, occupancy (67.4%), ADR ($127.14) and RevPAR ($85.70) had moderate gains this year through September 2017. RevPAR increased by 2.6% September year-over-year 2017 due to a 2% increase in ADR and 0.6% increase in occupancy. However, RevPAR growth slowed compared to this time last year when it was up 3.2% on a year-over-year basis. Of the 25 major markets tracked by STR, nine had negative year-over-year RevPAR growth as of September 2017. These included Chicago, Dallas (-1.4%), Los Angeles, Miami, Minneapolis, New Orleans, New York, Philadelphia and San Francisco.

Based on STR's September 2017 pipeline report, a total of 188,479 rooms across 1,440 projects are under construction, which is a 5.7% increase year-over-year. STR expects supply growth to peak in 2018 at 2.1%, which is higher than the 20 year average of 1.8%. In addition, markets with the highest number of rooms under construction as of September 2017 include New York City (13,533), Dallas (7,047), Nashville (5,497) and Las Vegas (5,125).

Instant Insights /

Property Fundamentals Should Remain Positive in 2018

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