DEC 2, 2013 5:32pm ET

Steeper Interest Rates to Increase CMBS Risk


Rising interest rates next year will heighten both the term risk of new deals and the refinance risk of outstanding commercial mortgage-backed securities, Moody’s Investors Service predicts.

Ratings should remain the same.

While increasing long-term interest rates typically goes hand-in-hand with rising rental income, there can be a delay, the agency said in a report released Monday. Higher rates nationwide can translate into higher rents but there are some exceptions. “The property market response is distinctly local and can lag in metro areas that [lack] a healthy supply/demand balance,” the agency says.

In addition, major CMBS sectors still exhibit excess inventory. This must be re-absorbed into the market before rents can rise.

Rates will have gone up by 2016, which is around the time that 10-year deals that came out during the peak years of 2006-07 will be maturing, Moody’s forecasts.

The quality of commercial mortgage-backed securities collateral has deteriorated over the last year, although it is nowhere near the level hit during the issuance boom of 2007, according to the agency. The average loan-to-value ratio will be 103% by yearend 2013, Moody’s predicts. This is up from 98% at the start of year, but well below the peak level of 118%.

Ratings of CMBS will be stable in 2014 thanks to relatively conservative underwriting and high debt-service coverage levels that have been in place since the crisis as well as to a recovering economy, according to Moody’s.

“Affirmations will constitute most of our ratings actions, with the remainder roughly evenly divided between upgrades and downgrades,” the agency says.

It forecasts a slight fall in the share of delinquent and specially serviced deals.

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