More US commercial property owners are expected to turn to commercial mortgage-backed security (CMBS) lenders next year instead of banks, according to a new Moody’s report.

Elevated interest rates, volatility in property values and weakened cash flows have led to tightened lending standards by banks and other commercial real estate (CRE) lenders through 2023.

Many new and existing borrowers are instead turning to CMBS, which pool individual loans and which have seen continued demand from investors focused more on the overall credit quality and yields of those securities’ loan pools, according to a Moody’s report published last Wednesday (Dec 6).

Multi-loan (conduit) and single-asset, single-borrower (SASB) CMBS loan issuance has declined overall this year from 2022 levels. But the second half of the year has seen a spike in SASB and CRE collateralised loan obligation (CLO) issuance, Moody’s found.

About 19 per cent of US$42.3 billion in performing CMBS conduit loans maturing next year carry high default risk. But CMBS investors, attracted by 10 per cent or greater yields on these loans, will help them achieve refinancing even as lenders have gradually required lower outstanding loan balances as a percentage of property value.

Landlords have struggled this year to keep up with rising coupon rates on mortgages, which most recently averaged 7.21 per cent. That is double the average rate of 3.62 per cent in 2020, according to Moody’s.

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The hardest-hit commercial properties have been offices, which have experienced rising vacancies since more employees began working from home during the coronavirus pandemic.

About US$12 billion in CMBS conduit loans maturing this or next year have already entered delinquency or special servicing, in which a third party helps the borrower work out a solution to avoid default.

While overall CMBS property yields will remain elevated in 2024, roughly US$14.7 billion in SASB CMBS carries yield less than 8 per cent and faces greater challenges to refinancing.

In the event of trouble refinancing, these and other CRE loans will face low interest from buyers. Moody’s expects transaction levels to remain low, matching 2021 levels, as wide bid-ask spreads between buyers and sellers have led to lower sales prices.

Borrowers’ debt service coverage ratios – their ability to make debt payments – have also declined closer to one-for-one. This has led to an uptick in interest-only loans as CMBS and other lenders continue putting capital to work, according to Moody’s. REUTERS