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U.S. CMBS Update Q3 2021: Issuance Picks Up, Leverage Remains Elevated

The COVID-19 Pandemic's Evolving Impact

This is S&P Global Ratings' seventh quarterly update on U.S. commercial mortgage-backed securities (CMBS) transactions published in the midst of the COVID-19 pandemic.

As of the end of September, the overall delinquency (DQ) rate for U.S. CMBS transactions was 4.4% and has steadily declined since peaking around 9.0% in the summer of 2020. Although the overall DQ rate has declined, the share of delinquent loans that are 60-plus-days delinquent (i.e., seriously delinquent) is high, at over 90%. A substantial majority of the total population of arrears, and loans in forbearance, remains in the lodging and retail sectors. The 30-plus-day DQ rate for retail and lodging is in the 9%-10% range, while multifamily and office is between 1%-2%, and industrial is below 1%.

SASB Constitutes Two-Thirds Of The Market

The single-asset single-borrower (SASB)/conduit mix (excluding commercial real estate collateralized loan obligations [CRE CLOs]) sits at about two-thirds versus one-third currently, at or near the historical high in regard to the SASB share. The drivers behind this trend remain in force, including the preferability of floating-rate debt in the current low-rate environment, combined with greater prepayment flexibility relative to longer-term fixed-rate debt, among other factors.

The property type exposure for SASBs continues to evolve. By 2015, SASB issuance volume had grown to around $30 billion annually and its property type composition was evenly split between office (28.6%), lodging (27.5%), and, to a slightly lesser degree, retail (20.3%). The remainder was primarily a mix of industrial, self-storage, and mixed-use asset types.

Chart 1


Fast forward to 2021, which was record setting for the sector at $30.5 billion in the first half alone! Forty-three SASB transactions priced in the first half; we rated 12 and provided preliminary feedback on 35. In the third quarter, issuance was $14.8 billion across 27 transactions; we rated nine of these and provided preliminary feedback on 19. (See table 1.)

Table 1

Summary Of S&P Global Ratings-Reviewed SASBs(i)
Weighted averages Q3 2021 Q2 2021 Q1 2021 H1 2021
No. of transactions reviewed 19 20 15 35
No. of transactions rated 9 7 5 12
Average deal size (mil. $) 547 853 513 710
S&P Global Ratings LTV (%) 112.7 122.9 114.9 119.5
S&P Global Ratings cap rate (%) 8.3 7.8 7.3 7.6
S&P Global Ratings NCF haircut (%) (17.0) (19.5) (16.8) (18.4)
S&P Global Ratings value variance (%) (43.4) (43.3) (42.2) (42.8)
Floating-rate/fixed-rate (%) 79.0/21.0 85.0/15.0 80.0/20.0 82.9/17.1
Primary markets (%) 68.8 62.0 81.6 70.4
Secondary markets (%) 17.8 29.8 15.9 23.8
Tertiary markets (%) 13.4 8.2 2.5 5.8
(i)Forty-three SASB transactions priced in the first half of 2021; we provided preliminary feedback on 35 of them. In Q3, 27 deals priced; we provided preliminary feedback on 19 of them. LTV--Loan-to-value. NCF--Net cash flow.

Though remaining highly elevated in our view, the SASB deals that we reviewed during third-quarter 2021 had a lower weighted average S&P Global Ratings LTV ratio (112.7%) than those we reviewed in the first and second quarters of the year. Floating-rate debt issuance has been driving the market's recovery and represented some 79% of S&P Global Ratings-reviewed SASB issuance in the third quarter, down slightly from 83% in the first half of the year. While the vast majority of SASBs were in primary markets, we did notice an increase in assets located in tertiary markets in the quarter. It should be noted, however, that these percentages are greatly influenced by the asset types being securitized in each quarter. (Table 2 provides a summary of deals we reviewed in Q3 by property type.)

Table 2

Summary of S&P Global Ratings-Reviewed SASBs In Q3 2021
By property type
Office Lodging Retail Multifamily Data center Self storage Other
No. of transactions reviewed 6 4 3 3 1 1 1
S&P Global Ratings' LTV (%) 118.3 107.5 91.7 119.1 116.7 138.9 109.2
S&P Global Rating's NCF haircut (%) (21.9) (17.0) (14.4) (17.8) (19.0) (12.8) (20.7)
S&P Global Ratings' value variance (%) (49.0) (39.0) (38.4) (47.8) (42.3) (39.3) (54.2)
Primary markets (%) 100.0 10.9 38.6 77.1 92.4 24.2 42.1
Secondary markets (%) 0.0 32.8 46.1 14.2 7.6 18.0 42.2
Tertiary (%) 0.0 56.3 15.2 8.7 0.0 57.8 15.5
Fixed rate (%) 50 75 0 0 0 0 0
Floating rate (%) 50 25 100 100 100 100 100

It seems clear that retail and lodging new issuances have been done at lower LTVs than other transactions, likely due to recent performance trends and the fact that those two sectors account for most of the current distress in the market. Continuing with LTV trends, the combination of higher LTVs and other concerning credit factors are usually the reasons why we decline to give preliminary feedback on a given SASB transaction. Although we acknowledge that SASB performance has historically been strong relative to that of conduits, we do feel growing levels of leverage--and assets with considerable near-term challenges--warrant caution and, in some instances, leave us unable to assign preliminary ratings to proposed SASB transactions.

Leverage Also Up In Conduits

The loan metrics for U.S. CMBS conduit new-issuance transactions were more aggressive in third-quarter 2021:

  • Leverage rose by over five percentage points quarter over quarter (q/q).
  • Debt service coverage (DSC) ratios fell by 0.2x to 2.28x, still at a very high level. We note that historically low rates and high interest only (IO) loan percentages are clearly contributing to the elevated DSC ratios.
  • Combined IO percentages remained high, but fell back markedly from second-quarter 2021. The decline was all in the full-term component, down more than six percentage points.
  • Our average cash flow and value variance to issuer values both increased modestly.
  • Effective loan counts (as measured by the Herfindahl-Hirschman Index score) and actual loan counts increased quite a bit, while the average deal size exceeded the $1 billion mark for the first time since first-quarter 2020.

Our 'BBB-' Credit Enhancement Levels Remain Well Above The Market Average

Our 'AAA' credit enhancement level was nearly flat with the market level in third-quarter 2021, but our 'BBB-' credit enhancement level was still 470 basis points (bps) higher. We continue to believe these 'BBB-' rated classes could prove relatively more vulnerable to event risk--especially with more concentrated pools--until the ultimate economic impact of the COVID-19 pandemic on CMBS performance becomes clearer. As a result, we have not rated many of these classes in recent vintages.

Our average cash flow and value variance to issuer values increased on a quarterly basis, by 80 bps and 40 bps to 16.0% and 41.1%, respectively.

Of the seven U.S. CMBS conduit transactions that priced in third-quarter 2021, we rated five (see table 3). The seven offerings had an average of 72 loans, with top-10 loan concentrations coming down 810 bps q/q to 44.4%. The average effective loan count climbed q/q to 33.1, from 26.6 in the second quarter.

Table 3

Summary Of S&P Global Ratings-Reviewed Conduits(i)
Weighted averages Q3 2021 Q2 2021 Q1 2021 2020 2019 2018 2017 2016
No. of transactions reviewed 7 9 5(ii) 28 52 42 48 40
No. of transactions rated 5 7 4 14 36 19 10 3
Average deal size (mil. $) 1,118 953 991 888 926 915 930 856
Average no. of loans 72 55 53 44 50 50 49 51
S&P Global Ratings LTV (%) 98.5 93.4 93.2 93.7 93.5 93.6 89.1 91.3
S&P Global Ratings DSC (x) 2.28 2.48 2.58 2.39 1.93 1.77 1.83 1.71
Final pool Herf/S&P Global Ratings Herf 33.1/43.2 26.6/29.2 24.1/25.7 24.1/33.1 27.7/33.7 28.1/36.3 26.3/34.9 25.4/36.0
% of full-term IO (final pools) 66.9 73.1 72.1 70.7 61.6 51.7 46.6 33
% of partial IO (final pools) 15.6 15.7 19.5 17.9 21.4 26.2 28.4 33.9
S&P Global Ratings NCF haircut (%) (16.0) (15.2) (15.6) (15.8) (13.4) (13) (11.9) (10.8)
S&P Global Ratings value variance (%) (41.1) (40.7) (41.4) (40.0) (36.0) (35.3) (33.0) (32.1)
'AAA' actual/S&P Global Ratings CE (%) 21.7/22.1 21.3/21.4 20.6/20.5 20.4/22.9 20.8/24.3 21.0/26.0 21.2/23.5 23.0/25.6
'BBB-' actual/S&P Global Ratings CE (%) 7.3/12.0 7.1/10.6 7.1/10.4 6.8/11.4 7.0/10.8 7.1/10.9 7.1/9.3 7.8/10.2
(i)S&P Global Ratings' credit enhancement levels reflect results for pools that we reviewed. Actual credit enhancement levels and other market statistics within the table represent every deal priced within a selected vintage or quarter, not just the ones we analyzed. (ii)Six conduits priced in Q1; we reviewed five of them. LTV--Loan-to-value. DSC--Debt service coverage. Herf--Herfindahl-Hirschman Index score. IO--Interest-only. NCF--Net cash flow. CE--Credit enhancement.

The conduit deals priced during third-quarter 2021 had higher LTV ratios and slightly lower DSCs on a quarterly basis. The average LTV was 98.5%--a 510 bps increase q/q. Average DSC fell 0.20x to 2.28x in the third quarter, maintaining an elevated level. This likely reflects two factors: low interest rates and a lot of full-term IO loans. For the purposes of our DSC analysis regarding partial IO periods, we utilize the figure after the IO period ends, but partial IO percentages remain somewhat low.

IO as an overall percentage of the collateral pools fell to about 83% in the third quarter, from 89% in the second quarter and nearly 92% in the first quarter. Full-term IO loans make up 66.9% of the collateral pools, a 620 bps decrease q/q, while partial-term IO exposures fell 10 bps to 15.6%.

In our review, we make negative adjustments to our loan-level recovery assumptions for all IO loans. In some conduit transactions, we make additional pool-level adjustments when we see very high IO loan concentrations or when an IO loan bucket has no discernible difference in LTV versus the average (i.e., it is not "pre-amortized"). The average S&P Global Ratings LTV for full-term IO loans issued in third-quarter 2021 was 99.7%, about 120 bps above the overall average.

Effective loan counts, or Herfindahl-Hirschman Index scores, which measure concentration or diversification by loan size, rose 650 bps to 33.1. We consider this level to be fully diversified; in fact, it's the highest print that we have on record for 2.0 transactions, which includes data back to first-quarter 2013. The average deal size rose $165 million to $1,118 million in third-quarter 2021, while the average number of loans rose to 72 from 55 in the previous quarter.

Property Type Exposures Continue To Shift Within Conduits

We continue to see quite a bit of movement in property type q/q. Industrial exposure fell back to 10%, from 15% last quarter--still well above the 6%-7% range in recent pre-pandemic vintages (namely 2018 and 2019). The property type continues to post impressive year-over-year (y/y) appreciation figures (up over 39% y/y per Green Street Advisors).

Retail exposure was 26% in the third quarter, up from 15% in the second quarter, now well above the 8%-9% lows set in mid-2020. There continues to be wide bifurcation in retail performance, with grocery-anchored centers, big box, and home improvement tending to outperform regional malls.

Lodging fell to 2%, from 3% last quarter. Revenue per available room is not expected to recover to 2019 levels until at least 2023. While leisure travel has rebounded significantly in 2021, corporate demand, as well as meeting and group demand, levels are significantly depressed. They will likely recover more gradually as companies return to the office, corporate travel and larger group meetings (both corporate and social) resume, corporate travel policies are eased, and overall fear of travel subsides (see "After Going Places It's Never Been, CMBS Lodging Is Back On The Road Again," published Oct. 14, 2021).

Office remains number one, albeit by a very narrow margin, at 26.5% for the third quarter, down 13 points q/q. There remains a considerable amount of uncertainty for the sector in the medium turn, as many return-to-office plans seem to have been delayed into 2022. Values remain down about 6% versus pre-COVID prints, according to Green Street.

Meanwhile, multifamily exposure climbed five percentage points to 19%. Apartments, especially in major cities, had been fighting headwinds from renters moving away during the pandemic. However, these seem to have subsided, likely helped by rapidly appreciating home values. Institutional quality values have surpassed pre-COVID levels by 18%, per Green Street.

Chart 2


$80 Billion Forecast For New Issuance Likely Too Low

There was about $69 billion in private-label CMBS issuance (excluding commercial real estate CLOs) year to date through the third quarter. The breakdown between single-asset single-borrower and conduit was roughly two-thirds/one-third (more than $45 billion SASB/$22 billion conduit). The overall total was up about 77% versus 2020 through three quarters. Our forecast of $80 billion is likely going to be too low, with the deal pipeline very active going into the fourth quarter.

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Senay Dawit, New York + 1 (212) 438 0132;
Secondary Contacts:Rachel Buck, Centennial + 1 (303) 721 4928;
James C Digney, New York + 1 (212) 438 1832;
Ryan Butler, New York + 1 (212) 438 2122;
Global Structured Finance Research:James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028;

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