2015 CMBS Outlook

The economy, coupled with low interest rates, contributed to continued growth in the commercial real estate and securitization markets. Property fundamentals for most CRE segments improved, fueling the appetite for CMBS investment. As demand increased, credit standards continued to ease as competition among loan originators progressed through the year. Credit metrics continued to weaken as leverage climbed to new post crisis highs and debt service trended downward despite lower interest rates and the prevalent use of interest-only loan structures.

Despite the slowdown at the start of the year, the economy posted meaningful growth through the remainder of the year, ending the Q3 at 3.9%. In addition to the economic expansion, employment figures scored solid gains throughout the year, as approximately 241,000 jobs were added in each of the last 11 months, lowering the unemployment rate to 5.8% from 7.0% a year earlier. The increase in payrolls is no longer contained in the technology and energy sectors but has broadened over the past year to include health care and leisure & hospitality, which contributed to economic growth in many regions of the country. This bodes well for commercial real estate (CRE) fundamentals across the U.S.

As the economy continues to expand, KBRA believes that real estate fundamentals will remain stable across all of the property type segments, many of which will experience flat to modest growth. However, the multifamily and lodging sectors are standouts, having experienced marked gains over the past few years. The performance of these two sectors in many markets is at or above that experienced during the height of the last real estate cycle. About Kroll Bond Rating Agency KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Kroll Bond Rating Agency Releases Report Examining CMBS Equity Cashouts

Kroll Bond Rating Agency (“KBRA”) has released a research report delving into borrower equity cashouts in the commercial mortgage backed securities market. Given increased competition amongst lenders, we sought to quantify the impact that equity cashouts have had in driving our main stressed metrics into riskier territory.

Although slightly less than half of the loans in KBRA’s Top 20 rated universe have returned equity to the borrower, we also individually reviewed characteristics of the loans to gauge the story behind the numbers. After further review, it is evident that a majority of the cashouts have occurred in loans where the borrowers have had long operating histories of at least five years and where equity has built-up in the property either through equity investments and/or asset appreciation.

That said, the credit metrics of these loans weakened faster than the broader universe. As one would expect, stressed leverage for cashout loans deteriorated faster than the broader Top 20 universe, ending Q2 2014 at 104.3% compared to 101.4% for Top 20 loans.