A Sector-By-Sector Look at How CMBS Is Expected to Perform This Year

Commercial mortgage backed securities grew in profitability for the ninth straight year in 2019, according to a new report from Fitch Ratings, but that streak is bound to come to an end in 2020 because of the widespread impacts of the coronavirus crisis.

The property-level net operating income for loans securitized in Fitch-ranked CMBS grew an average of 2.0% in the last calendar year, following growth rates of 1.9% in 2018 and 2.0% in 2017. Yet ominous signs were already on the horizon for the hotel sector, where NOI began a decline in 2019, and retail, where growth was close to zero.

Hotels saw their NOI dip by 3.1% last year, following a 0.2% decline in 2018. But they were an outlier in a larger universe that saw 60% of properties that reported financials in both 2018 and 2019 increase NOI.

Industrial properties had the highest positive NOI growth rate at 4.2%. They were trailed by multifamily properties at 4.7%, offices at 3.3%, self-storage at 1.8% and retail at 0.4%.

The growth in industrial properties was largely consistent across U.S. regions, although the Southwest, Plains, New England and Far West all exceeded the national average. The sole lagging region was the Great Lakes, where NOI grew at just 0.8%. Fitch expects this sector to stay healthy in 2020, particularly as a result of the turn towards greater online shopping leading to high-demand for “last mile” services. But with overall declines in economic activity thanks to the public health crisis, Fitch anticipates slower NOI growth in the coming years. 

The company is more bearish on office properties, which saw NOI jump from 1.8% to 3.3% from 2018 to 2019. In March, it revised its outlook from “stable” to “negative,” as demand for office space evolves as a result of the pandemic. A quick resolution to the crisis could put an end to the diminished demand, but if most employees continue working from their homes, the downward trend is likely to continue.

Fitch also adjusted its forecast for multifamily properties from “stable” to “negative” in March due to the pandemic. But it said there’s a possibility that elevated supply, federal and state stimulus and aid programs could mitigate what would otherwise be a steeper performance decline in the sector. 

Hotels, meanwhile, were already projected to be “stable/negative” heading into the coronavirus crisis. Fitch downgraded that outlook to “negative” in March. It now expects revenue per available room to drop 45% in 2020 before rebounding by 50% in 2021. Conseqeuntly, it anticipates that NOI will also see a recovery next year.