U.S. Property Owners Likely to Seek CMBS Financing in 2024, Predicts Moody’s

The coming year is expected to see a surge in U.S. commercial property owners opting for financing through the issuance of commercial mortgage-backed securities (CMBS), as suggested by a recent analysis from Moody’s. 

Due to heightened interest rates, fluctuating property values, and diminished cash flows, banks and other lenders in the commercial real estate sector have been compelled to adopt stricter lending criteria throughout 2023. 

This trend has prompted both new and existing borrowers to consider CMBS as an alternative source of funding. These securities are formed by bundling individual loans together and have maintained investor appeal due to their strong credit quality and attractive yield prospects, as highlighted in a recent Moody’s report. 

Although there has been an overall decrease in multi-loan (conduit) and single-asset, single-borrower (SASB) CMBS loan issuances this year compared to 2022 figures, the latter half of the year witnessed an upturn in SASB issuances as well as CRE collateralized loan obligation (CLO) activity, according to Moody’s research. 

Moody’s indicates that approximately 19% of the $42.3 billion worth of performing CMBS conduit loans set to mature next year are at a high risk of default. However, investors drawn by yields exceeding 10% are likely to support refinancing efforts despite lenders increasingly demanding lower loan-to-value ratios. 

Property owners have faced challenges this year with mortgage coupon rates climbing steeply; they currently average at 7.21%, which is significantly higher than the average rate of 3.62% recorded back in 2020, based on data from Moody’s. 

Office spaces have particularly felt the impact of growing vacancy rates following a shift towards remote work during the COVID-19 pandemic. 

Moody’s data reveals that around $12 billion worth of maturing CMBS conduit loans for this year and the next have fallen into delinquency or special servicing—a scenario where a third-party intervenes to help prevent borrower default. 

Despite expectations for continued high yields from CMBS properties in 2024, there remains about $14.7 billion worth of SASB CMBS with yields below 8%, facing tougher refinancing conditions. 

Should these and other CRE loans encounter refinancing difficulties, buyer interest is anticipated to be scant. Transaction volumes are predicted by Moody’s to stay subdued, akin to those seen in 2021 due largely to significant bid-ask spreads causing lower sales prices. 

Furthermore, borrowers’ debt service coverage ratios—which measure their capacity for debt repayment—have declined towards a one-to-one threshold. This situation has led to an increase in interest-only loans as CMBS lenders and others remain engaged in deploying capital within the market space, according to insights from Moody’s. 

December 29, 2023