Expect a tally of $149 billion in commercial real estate securitization volume, says KBRA

The market for securitization of commercial real estate is likely to exceed the production level in 2021, as rising employment rates in particular support a more positive economic outlook, according to the Kroll Bond Rating Agency.

Private Label Commercial Real Estate (CRE) securitisations could total US $ 149 billion – more than double the volume of US $ 62.2 billion in 2020. Next year, KBRA is forecasting year-end volume between 150 and 165 billion U.S. dollar.

The rating agency’s forecast of November 23, 2022 Sector Outlook – CMBS: Full Steam Ahead, is particularly positive considering that the market for commercial real estate transactions in 2021 outperformed the market of 2020. Commercial mortgage-backed securities, especially conduits and single borrower / large exposures, are expected to end this year with $ 105 billion in issuance, a level not seen in 14 years, the report said.

Line output could spike significantly, although the increase will come from a relatively low base, the agency said. The average KBRA loan-to-value (KLTV) rose from 95% in 2020 to 98.2% in the year to date, the agency said. The KBRA Interest Only Index is 75.8% so far in 2021, breaking the 70% threshold. KBRA sees potential for increasing leverage in the future.

Commercial Real Estate Collateralized Loan Obligations (CLOs) are expected to reach a record year this year and exceed the annual conduit volume for the first time. In 2022, KBRA predicts a repeat of the sustained growth that will surpass the conduits, the report said.

Despite positive expectations for transaction production, KBRA had several reservations, particularly with respect to real estate subsectors. Office CMBS offerings could weaken in 2022 and in the future due to “hybrid work” or people who mostly work from home, which could potentially further dampen demand for office space.

In addition, hotel and non-essential retail properties are showing declining conduit trends, with retail sales declining to 15.4% year-to-date in 2021, down from 17.5% in 2019 and 24.4% in 2018, KBRA said . During the same period, the number of accommodations fell from 10.3% to 3.6%.

Several property subsectors are expected to perform well this year. KBRA expects healthy volumes for industrial and multi-family houses. They should remain the top types of property, largely funded by floating rate bonds, the report said.

Apartment building CLO exposure is expected to remain high, which this year has increased from 50% in previous years to 60%. Ninety-three percent of households made partial or full rental payments in October, KBRA said.

In the industrial segment, the demand for space exceeded the new supply. E-commerce and third party demand for logistics space has increased due to the popularity of online sales these days. KBRA expects the industrial market to perform well as supply chain and transportation delays during the pandemic resulted in an increase in the business portfolio. According to KBRA, construction will not be able to keep up with demand, which will lead to lower vacancies and higher rents.

KBRA-rated commercial real estate (CRE) securities largely retained their AAA and A (97%) ratings, but the agency downgraded 585 ratings on 116 transactions since the pandemic began in October, down to 11% of CRE ratings before the pandemic arrived in March 2020.