CMBS 2020 Volume Clocks In At an Eight-Year Low of $53B

CMBS volume is expected to hit lows not seen since 2012.

Kroll Bond Rating Agency expects CMBS volume to end 2020 between $53 billion and $55 billion, which is well below the $95 billion it forecasted last fall.

The good news is that KBRA expects CMBS issuance to rebound slightly to $60 billion in 2021, driven by stable demand for multifamily, industrial (more specifically last-mile distribution centers), individual pockets of office with tenants that have good credit and essential retail.

While KBRA thinks the virus is expected to remain a significant headwind to issuance volume, GDP growth, effective vaccine distribution and low interest rates could drive a rebound. 

As KBRA formulated its issuance estimate, it looked at the backdrop of recent CRE sales, forecasted CRE transaction volume and the current originations environment. CRE sales have dropped 39.8%—from $416.5 billion as of Q3 2019 to $250.6 billion for the same period in 2002—across significant property types including office, industrial, retail, multifamily, and hotels, according to Real Capital Analytics. 

All major property sectors saw year-over-year declines, ranging from 25% (industrial) to 70.9% (hotels). Also, commercial and multifamily mortgage loan originations, including CMBS, commercial banks, life insurance companies and the GSEs, were 47% lower as of Q3 2020 compared to a year ago, according to the Mortgage Bankers Association’s quarterly survey.

While sales volumes have plummeted, CRE pricing has held steady during 2020. While RCA’s U.S. National All-Property Index fell 0.2% during Q2 2020, it increased 0.3%, reaching an all-time during Q3. Overall, it is up 1.4% YOY. Multifamily (6.7%) and industrial (7.4%) pricing growth was the strongest on an annualized basis in Q3, according to RCA.

“This overall increasing trajectory for the total CRE market is masking the diverging performance of the individual property types, which have been impacted to varying degrees by the pandemic,” according to KBRA.

According to the ULI Real Estate Economic Forecast as of October 2020, CRE pricing is expected to be flat in 2021 before resuming growth in 2022. 

KBRA says that low interest rates, the 10-year Treasury was at 0.52% on August 4, have helped drive transaction volume as borrowers seek to take advantage of the current rates. It expects those continued low rates to help drive deal volume in 2021. 

“We expect activity to be at relatively low levels at the start of 2021, with a pickup as the year progresses, particularly if a viable vaccine is introduced to the broader public,” according to KBRA.