Issuance of securities backed by U.S. commercial real estate (CRE) loans experienced a rare rebound in the third quarter of this year, according to ratings agency DBRS Morningstar. Despite this positive development, the report suggests that the sector will continue to face significant challenges until 2023.
In the third quarter, approximately $3 billion in new collateralized loan obligations (CLOs) backed by CRE loans were issued, marking a significant increase compared to the previous quarter’s issuance of less than $1 billion in CRE CLOs. However, DBRS analysts predict a decline in issuance volume in the fourth quarter due to ongoing difficulties such as elevated interest rates and vacancies.
The rebound in the third quarter might be seen as a modest spike in volume, considering it represents several quarters of origination volume by issuers. As a result, it will take time for them to accumulate enough collateral for the next transaction, the analysts mentioned in the report. The anticipated total issuance for 2023 is expected to be less than $10 billion, which is considerably lower than market expectations.
Delinquencies in commercial real estate loans were also highlighted in the report. Office-backed loans accounted for nearly half of all CRE delinquencies in the third quarter, reflecting the challenges faced by office owners nationwide due to the remote working trend brought on by the pandemic. Additionally, delinquencies in lodging properties experienced a substantial increase, jumping to 3.40% in September from 0.28% in June. Similarly, loans secured by self-storage properties witnessed a significant quarter-to-quarter rise in delinquencies.
Despite these challenges, the overall delinquency rate for CRE CLOs remained relatively stable at 3.27% in the third quarter, in line with the rate observed in the previous quarter. As of September, there were $2.67 billion in delinquent CRE CLO loans, representing a $20 million increase from the second quarter.
DBRS Morningstar’s report acknowledged that the current interest rate and investment sales environments have made loan refinancing and property sale exit strategies increasingly difficult for borrowers. Consequently, the majority of borrowers are expected to exercise built-in loan extension options.
While the rebound in issuance of securities backed by CRE loans in the third quarter offers a glimmer of hope, the sector is likely to continue grappling with numerous challenges in the foreseeable future.
1. How did securities backed by U.S. commercial real estate loans perform in the third quarter?
Issuance of securities backed by U.S. commercial real estate loans experienced a rebound, with approximately $3 billion in new collateralized loan obligations (CLOs) issued.
2. What challenges are expected to persist in the commercial real estate sector?
Challenges such as elevated interest rates and vacancies are expected to continue impacting the commercial real estate sector.
3. What is the anticipated total issuance for 2023?
The report suggests that the total issuance for 2023 is likely to be less than $10 billion, which is significantly lower than market expectations.
4. Which type of loans had the highest delinquency rates in the third quarter?
Office-backed loans accounted for nearly half of all CRE delinquencies in the third quarter.
5. What is the overall delinquency rate for CRE CLOs?
The overall delinquency rate for CRE CLOs remained relatively stable at 3.27% in the third quarter.