8 Vital Signs for the 2015 CMBS Market
January 16, 2015 11:06 AM
Commercial mortgage-backed security performance could come under further strain this year, as the underwriting on the underlying commercial mortgages continues to loosen. Here are eight indicators to consider in sizing up the CMBS market this year. Image: Fotolia
Private Commercial Construction
The dollar volume of commercial construction has the highest correlation to projected CMBS losses in any given year, according to Standard & Poor's. The Census Bureau's estimates of private commercial construction volume was $136 billion in 2014, compared to just $80 billion in 2011. Image: Fotolia
A New Wave of Maturing '05-'07 Loans
More than $300 billion in maturing commercial mortgages originally underwritten when standards were very loose between 2005 and 2007 will need to be refinanced between 2015 and 2017. That's more than 2.5 times the amount that matured from 2012 to 2014, according to Trepp. Image: Fotolia
Better Economic Expectations
The economy will be "somewhat better" this year, 61% of commercial mortgage market respondents to a Commercial Real Estate Council survey believe. Another 3% even believe it will be "much better," while only 1% believe it will be "somewhat worse," and 35% believe it will be the "same." Image: Fotolia
CRE Prices
There are variations by property type and region, but the price paid for commercial real estate rose about 14% collectively in the last 12 months as of October, according to Moody's/RCA Commercial Property Price Indices. Central business district office properties overall saw the greatest 12-month gains at more than 17%. Image: Fotolia
Retailer Closures
J.C. Penney and Macy's recently divulged plans to close in total more than 50 stores this year, Fitch and Morningstar recently noted. The 40 stores that JCP plans to close and the 14 Macy's plans to close might not affect CMBS in the short run but if the trend continues it could increase delinquencies and losses. Image: Bloomberg News
Employment
The United States added an average of 241,000 jobs per month in 2014, reducing the unemployment rate to below 6%. This, combined with a broadening in sectors that are experiencing payroll growth, strengthen the outlook for CRE fundamentals, according to Kroll Bond Rating Agency. Image: Fotolia
Payment Stresses
The extent to which underwriting is based on future, rather than actual, cash-flows is widely considered an indicator of loosening standards, and the presence of interest-only loans and higher interest rates could also put pressure on CMBS borrowers' ability to repay. About 15% of the loans collateralizing new CMBS issuance were underwritten to expected cash-flows that are 20% greater than 2013's actual cash-flows, according to The TCW Group. Image: Fotolia
Credit Enhancements
An increase in the loss-absorbing financial protections designed to shield investors of higher-rated CMBS tranches may also help offset the looser underwriting standards of underlying loans. For example, the credit enhancement requirements for low-grade, triple-B-rated tranches have increased 2% at Moody's. However, other ratings agencies' willingness to rate deals with lower levels of credit enhancement may be undercutting the policy's effectiveness, according to TCW. Image: Fotolia
