11.23.16: KBRA Releases 2017 CMBS Outlook

After six consecutive years of issuance growth, the CMBS market expansion came to an abrupt halt in 2016, according to Kroll Bond Rating Agency (KBRA). Private label CMBS is expected to end 2016 within a range of about $65-$70 billion, approximately 30% lower than 2015’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.

As KBRA reflects on 2017, the firm is 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. Although these underlying commercial real estate attributes are favorable, however, crosscurrents have been forming: Nonfarm monthly payroll additions weakened year-to-date through October compared with 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 have 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 commercial real estate 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.

This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , . Bookmark the permalink.

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