NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) today released a report summarizing its views for the CMBS Industry in 2016.
After a sustained period of low interest rates, the Federal Reserve appears ready to raise interest rates for the first time in ten years. With economic growth expected to be positive in 2016, we believe that even if there are modest rate increases, commercial real estate fundamentals and valuations may be only marginally affected, if at all. CMBS issuance is on track to reach approximately $100 billion in 2015 and we expect issuance to reach $125 billion in 2016 and likely aided by the volume of loans scheduled to mature during the year coupled with borrowers seeking to lock in new financing in anticipation of a rising interest rate environment.
Along with the high demand for refinancing loans in 2016 comes the continued deterioration of origination standards, which has maintained a downward trend over the past several years. Leverage has climbed to new post crisis highs, while debt service coverage has trended downwards despite an increase in exposure to interest-only structures. In addition, there has been a notable increase in credit bar-belling as the proportion of high leverage loans has continued to increase.
The overwhelming majority of rating actions are expected to be affirmations. Positive rating movement is also likely to occur, particularly on 2012 vintage transactions which are entering their fourth year of seasoning and have benefited from defeasance and deleveraging due to amortization. The number of downgrades should be limited, and largely limited to speculative grade rated classes.
Please feel free to reach out to us with any comments or questions regarding our 2016 Outlook.
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KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).