Commercial Mortgage-Backed Securities (CMBS) loans experienced a notable increase in delinquencies in 2023, climbing by nearly 1.5 percentage points to an overall rate of 4.51%.
This upward movement in delinquency rates—primarily driven by the office sector—is a noteworthy shift from previous trends.
Retail stood out as the only asset class to see a reduction in delinquency rates year over year despite traditionally high levels of delinquency within this sector.
Office loan defaults increased sharply by 4.24 percentage points over the year, making the office sector the most substantial contributor to the rising delinquency rates in 2023.
Analysis revealed that (1) nearly 70% of office CMBS loans did not pay off at maturity, and (2) there is a striking disparity based on the loan size.
High-balance loans—particularly those over $100 million—had a markedly lower payoff rate than their smaller counterparts. This disparity suggests a looming refinancing challenge for a significant portion of office CMBS loans 2024.
Despite the uptrend in delinquencies, the final months 2023 saw a slight decline. Experts say this unexpected shift indicates potential volatility within the market. A renewed increase could follow this temporary dip.
Historical data show that delinquency rates peaked at significantly higher levels, such as in July 2012 and during the pandemic in June 2020.
While current rates remain well below these peaks, the market anticipates further stress, influenced partly by loan modifications and extensions in 2023 that have deferred maturities to future dates.
The forecast for 2024 suggests a proactive year for the CMBS market. With an expected decrease in borrowing costs courtesy of the Federal Reserve's policy adjustments, borrowers struggling with current interest rates may see some relief.
However, it's essential to understand that lower does not necessarily mean cheap. Even with reduced rates, borrowing costs will likely remain higher than in recent years, And a cautious approach to loan maturities and delinquencies is demanded.
The issuance of non-agency CMBS saw a massive decline in 2023, dropping 44% to$39.33 billion — a stark contrast to the cyclical high of $110.56 billion in2021.
Despite this downturn, the outlook for 2024 is optimistic, with projections of are covery in issuance volume to approximately $55 billion.
This anticipated increase in issuance volume signals a potential improvement in market liquidity, which has been a pressing concern for the industry.
Several factors are set to influence the CMBS loan market in 2024:
With a large portion of office CMBS loans facing refinancing difficulties, the office sector may continue to be a significant driver of delinquency rates. The ability of these loans to secure refinancing in the current economic climate will be a critical factor to watch.
The retail sector's unique position (having shown a decrease in delinquency rates amidst broader market challenges) will be interesting to monitor. This sector's resilience or potential vulnerability could significantly impact overall CMBS delinquency trends.
Lenders' strategies to address loan maturities and delinquencies (including forced sales and loan modifications) will play a crucial role in shaping the market landscape. Borrower decisions—particularly in cases where walking away becomes a more viable option—will also influence market dynamics.
The Federal Reserve's efforts to lower costs could support the CMBS market. However, the effectiveness of these measures (especially in the context of historical borrowing rates) will be vital in determining the market's direction.
The CMBS loan market in 2024 is at a crucial turning point. Several elements will influence its direction:
How well the industry handles these challenges will be crucial for foreseeing the path of the next year's CMBS loan market.
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