• Mon. Dec 4th, 2023

    Rebound in Securities Backed by U.S. Commercial Real Estate Loans, but Challenges Loom

    ByEmma Wolukau-Wanambwa

    Nov 20, 2023
    Rebound in Securities Backed by U.S. Commercial Real Estate Loans, but Challenges Loom

    Securities backed by commercial real estate (CRE) loans in the United States experienced a rare resurgence in the third quarter, signaling a positive shift in the sector. However, despite this rebound, analysts from ratings agency DBRS Morningstar project continued struggles for the CRE industry through 2023.

    According to a report released by DBRS, the third quarter witnessed approximately $3 billion in new collateralized loan obligations (CLOs) backed by CRE loans, a substantial increase from the previous quarter’s issuance of under $1 billion. Despite this encouraging development, DBRS analysts caution that the fourth quarter is expected to see a decline in issuance volume due to ongoing challenges, such as elevated interest rates and persistently high vacancy rates.

    “While the modest spike in volume during the third quarter represents a promising trend, issuers will need time to accumulate sufficient collateral for future transactions,” the analysts stated.

    DBRS predicts that the total issuance for 2023 will likely remain below market expectations at less than $10 billion.

    The report also highlights the impact of the shifting landscape on different types of commercial properties. Office-backed loans accounted for nearly half of all CRE delinquencies in the third quarter. The widespread adoption of remote working, influenced by the post-pandemic environment, continues to challenge office owners nationwide.

    In contrast, loans secured by lodging properties experienced the most significant rise in delinquencies from the previous quarter, jumping from 0.28% in June to 3.40% in September. Meanwhile, loans backed by self-storage properties saw the second-largest quarterly increase in delinquencies.

    DBRS notes that the delinquency rate for CRE CLOs in the third quarter, at 3.27%, remains similar to the rate in the previous quarter. As of September, approximately $2.67 billion in CRE CLO loans were delinquent, indicating a $20 million increase from the second quarter.

    The challenging refinancing and property sale landscape, impacted by current interest rates and investment sales environments, has compelled the majority of borrowers to utilize built-in loan extension options, according to the report.

    While the rebound in CRE loan-backed securities presents positive momentum for the sector, further challenges lie ahead. The industry is anticipated to face obstacles such as interest rates, vacancies, and refinancing difficulties in the coming years. Navigating these challenges will require strategic planning and adaptability from industry stakeholders.

    Frequently Asked Questions (FAQ)

    1. What are collateralized loan obligations (CLOs)?

    Collateralized loan obligations (CLOs) are securities backed by a pool of loans. These loans can include commercial real estate loans or other types of loans, and the CLOs are typically divided into different risk tranches to appeal to various investors.

    2. Why did the third quarter see a rebound in CRE CLO issuance?

    The third quarter saw a rebound in CRE CLO issuance primarily due to an increase in originations and the accumulation of sufficient collateral for transactions. However, analysts predict a decline in issuance volume in the fourth quarter due to ongoing challenges in the CRE sector.

    3. Which types of commercial properties faced the highest delinquencies in the third quarter?

    Office-backed loans accounted for the majority of CRE delinquencies in the third quarter. Lodging properties experienced a significant rise in delinquencies, while self-storage properties also saw an increase, albeit to a lesser extent.

    4. How has the challenging landscape affected borrowers?

    Borrowers have been faced with difficulties in loan refinancing and property sale exit strategies. Many borrowers have opted to exercise built-in loan extension options to navigate the current interest rate and investment sales environments.

    Note: The original article source is Reuters.