‘Endless wave’ of CRE challenges continue with CMBS | Insights | Bloomberg Professional Services

Background

The timing of a cooling U.S. commercial mortgage-backed securities market doesn’t bode well for regional banks. Sales of the securities without government backing fell about 80% in the first quarter from a year earlier, due in part to rising interest rates and concerns of defaults. Regional banks have pulled back after the recent crisis, exposing the widest spreads on commercial mortgage bonds in recent years.

The drop in non-agency CMBS issuance this year has made it harder for owners of commercial real estate, including malls and offices, that are seeking to refinance maturing debts. CMBS typically represent a significant part of the demand for these loans.

Analysts say refinancing will be tough after rising interest rates led to the collapse of SVB Financial and Signature Bank. Without adequate refinancing, assets of deteriorating quality could burden bank balance sheets.

Meanwhile, Wells Fargo & Co. announced it’s reviewing more than $35 billion worth of office loans to decrease risk after increasing credit-loss allowances for four consecutive quarters. Meanwhile, borrowers face nearly $1.5 trillion of U.S. commercial real estate debt that comes due for repayment by the end of 2025.

The issue

Issuance of U.S. private-label CMBS is only at $6.1 billion so far in 2023, compared with full-year 2022 and 2021 sales of $76.9 billion and $117.1 billion, respectively. Risk aversion is rising among CRE debt investors because of the persistence of work-from-home trends and larger economic concerns.

“Downward price pressure and low sales volumes validate the mounting concerns about CRE, and small banks would bear a disproportionate burden of any defaults,” wrote Bloomberg Economics economist Stuart Paul. Loans packaged into CMBS facing maturities or balloon payments will require refinancing — but regional banks may be reluctant to extend refinancing as deposits flee.

Bloomberg Intelligence analyst Jeffrey S. Langbaum shared a similar sentiment, explaining that the difficulty in refinancing debt and failing regional banks add another element to the‌ “endless wave” of CRE challenges.

Tracking

Use Bloomberg’s LEAG, CMB, BLNR, BI and LLKU tools to analyze the CMBS market.

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