Dour Industry Sentiment About CRE Markets Appears To Be Playing Out

Cracks are poised to appear in the CMBS market as 2022 draws to a close, as the CMBS special servicing rate rose last month for the first time since the third quarter of 2020 — and that aligns closely with industry sentiment expressed earlier this year in a far-reaching study by Trepp.

Ten out of every eleven respondents to Trepp’s recent sentiment survey said they expected CMBS delinquencies to rise over the next six months. The CMBS delinquency rate declined by eight basis points in August to 2.98% and has now fallen for 24 out of the last 26 months. But while that rate “generally moves in tandem with broader economic trends, different economic indicators are relaying mixed signals about the overall health of the U.S economy,” says Trepp’s Jack LaForge, including near-historic unemployment against the backdrop of declining US GDP and high inflation.  ”Within this limbo period, it makes sense that the CMBS Delinquency Rate has continued to fall, but with a broader recession predicted by economists to take place in 2023, cracks in the CMBS market are likely to appear as 2022 concludes.”

As an example, LaForge points out that the CMBS special servicing rate rose 13 basis points in August to 4.92%, with the distress primarily focused on retail and multifamily, which saw 117 and 67 basis point jumps, to 11.03% and 1.90%, respectively.

“This month’s large retail transfers were heavily tied to regional and superregional malls that were transferred due to imminent monetary default,” Trepp’s Jack LaForge notes, adding that Trepp will be watching these sectors closely to see if similar distress is reflected in next month’s delinquency report.

And while the office sector generally has been on one of the best-performing property types in the CMBS market over the past three years, 70% of respondents in the Trepp sentiment survey predicted the sector will have the most distress in 2022. LaForge says that similarly, more than 70% of the survey respondents have in place either a hybrid or completely remote working model within their own company, and “this doesn’t seem to be a coincidence,” he says. “It’s likely that many of our respondents’ feelings about the office sector were shaped in part by their own personal experiences, now going to the office less than they had in the pre-COVID era.”

In addition, many five to ten year leases are set to expire soon, including 245 Park Avenue in New York and Market Square in San Francisco.

“If companies forego renewing these leases and turn to the hybrid or remote model, vast amounts of office space across the country could become vacant, which is bad news for the loans attached to them,” LaForge says.

The Trepp survey respondents also anticipated the multifamily sector would lead transaction activity this year, and LaForge says the data appears to support that as well.