CMBS market hurt by real estate slowdown

Commercial mortgage-backed securities have been affected by the real estate slowdown.

Many property management companies may have experienced slow progress in the commercial real estate market's recovery during the past several months. However, this situation has started to become an issue for the commercial mortgage-backed securities market, and continued growth could be a long time away, according to a report from CoStar.

Office properties involved with CMBS loans have not recovered as strongly as other property types, which may concern some, as these packages add up to approximately 30 percent of all CMBS. Additionally, this sector experienced heightened delinquency levels during the first half of the year, the report explained, citing a report from S&P Structured Finance Research.

This issue was further complicated by a recent payoff rate drop for office loans, as the figure declined to 40 percent during the second quarter. Overall loss severity rate rose nearly 10 percentage points during that quarter, the report noted.

"It is our view that we may not start to see any meaningful NOI growth until 2015, when leases signed at the market's trough in 2010 start to benefit from rollover to higher rents," said Larry Kay, director of S&P, according to the news source. "In addition, corporate 'restacking' by making offices smaller and more efficient, along with reductions in square footage per office worker, could curb demand for space."

Issuance improves, still a long way off from pre-recession levels

Despite the issues with CMBS loans, there were some positives in the report. Loan issuance should rise this year, and S&P projected that the figure could reach as much as $35 billion by the end of the year, if not higher.

"Though it seems that with the recent activity, it could actually exceed that," said Kurt Pollem, senior director for the commercial mortgage group at S&P. "There's still a wall of CMBS and commercial real estate in general that has to be refinanced in the next three years."

The issuance figure rose to $200 billion in 2007, the report explained. This has not been matched, and that point may not be reached for a long time.

Additionally, Pollem added that rents are more than 10 percent lower than the peak level reached in 2008, and continued improvements could be slow-going for the foreseeable future.

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