CMBS: Fundamentals Continue to Recover from COVID
We continue to favor AA to BBB-rated bonds from new issue and secondary deals, CRE-CLO, and select SASB deals.
CMBS spreads widened in the second quarter along with broader fixed-income credit markets: 10-year conduit AAA bond spreads ended the quarter at 132 basis points, wider than 100 basis points in the first quarter, and 72 basis points in the fourth quarter of 2021. First quarter 2022 set a post-Great Financial Crisis record with $45 billion in issuance, 83 percent higher than first quarter 2021’s $24 billion, but the challenging macroeconomic backdrop reduced second quarter 2022 issuance to $30 billion, a 28 percent drop from first quarter 2021’s $42 billion. Wider spreads and elevated volatility will likely continue to suppress issuance in the near term.
Market conditions also raise questions about commercial real estate valuations. Signals from the public and private markets are conflicting: while real estate investment trust equity-implied cap rates are 120 basis points higher versus the end of last year, private market indexes show cap rates moved much less.
While risk markets have been volatile, CMBS refinancings were orderly. Some 78 percent of CMBS loans were repaid on time as of June 30, 2022, in line with the 10-year average of 81 percent. Near-term CMBS maturities are relatively limited: of the $2.3 trillion in commercial real estate (CRE) mortgages maturing in 2022–2027, only 7 percent are held by CMBS.
CMBS fundamentals have continued to recover since the height of the COVID-19 pandemic. The 60+ day delinquency rate for the conduit CMBS universe was around 3.5 percent in June, down from 4.0 percent in first quarter 2022 and 6.5 percent from the peak in summer 2020. The post-COVID recovery in lodging has been particularly encouraging, as the hotel 60+ day delinquency rate has decreased from its COVID high of 20.0 percent to 7.6 percent as of June 30.
We believe CMBS performance will vary based on the unique collateral, structure, and sponsorship within each transaction. The continuation of the broad-based COVID recovery remains encouraging for commercial real estate investors, though longer-term secular changes such as the change in office use as well as higher borrowing costs will apply pressure to certain borrowers over the months and years to come. We continue to favor AA to BBB-rated bonds from new issue and secondary deals, CRE-CLO, and select single asset-single borrower (SASB) deals with strong sponsorship and fundamentally supported property types.
The 60-Day CMBS Delinquency Rate Has Decreased Significantly Since COVID
Source: Guggenheim Investments, Bank of America, JP Morgan, Morgan Stanley. Data as of 6.30.2022.
—By Tom Nash and Hongli Yang
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