NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) today released a report summarizing its views and outlook for the CMBS Industry in 2017.
After six consecutive years of issuance growth, the CMBS market expansion came to an abrupt halt in 2016. Private label CMBS is expected to end 2016 within a range of about $65-$70 billion, approximately 30% lower than last year’s $95.8 billion. Despite what could be a slow start to the year, we believe that new CMBS private label issuance in 2017 could end the year within a range of $55-$65 billion, slightly below 2016 levels. In arriving at that figure we considered a number of factors, both positive and negative, including:
- Dialogues that we’ve had with both loan originators and issuers
- CMBS 2017 loan maturities and refinance rates
- Slowing property rent and price growth
- Increase in CMBS market share from reduced commercial bank activity/originations
- Spread volatility as the new administration announces proposed policies
- Grievances from borrowers about CMBS servicer and origination practices
- Mortgage Bankers Association 2017 forecast citing increased originations
- Favorable demand for CRE according to a recently released investor study
As we look towards 2017, we are cautious, but constructive on CMBS issuance, property fundamentals and collateral performance. Employment growth continues, property fundamentals are positive across sectors, and interest rates remain at low levels. However, although these underlying CRE attributes are favorable, crosscurrents have been forming: nonfarm monthly payroll additions weakened YTD through October compared to the monthly job increases in 2015; construction levels are still low, but the margin between completions and absorption is narrowing; property rent and price growth has slowed, and downward price adjustments may not be too far away; interest rates are trending higher, and with the additional costs associated with risk retention, total CRE borrowing costs are expected to be higher in 2017.
Slowing rents and price growth will likely limit the number of defeasances and loan prepayments in 2017, leading to fewer upgrades. Excess supply in certain sectors and markets, could generate more property and market specific downgrades, which are expected to be contained within the subordinate classes. Overall, as in 2016, ratings stability should continue in 2017, but the ratings upgrade to downgrade ratio will likely narrow.
Please feel free to reach out to us with any comments or questions on our CMBS 2017 Outlook.
About Kroll Bond Rating Agency
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).