NEW YORK (S&P Global Ratings) Sept. 27, 2023--S&P Global Ratings today updated its criteria guidance article, "Guidance: CMBS Global Property Evaluation Methodology," originally published March 13, 2019.
The guidance relates to our application of the criteria article, "CMBS Global Property Evaluation Methodology," Sept. 5, 2012. The guidance document is intended to be read in conjunction with the criteria.
We updated our U.S./Canadian capitalization rate (cap rates) assumptions for class B office assets to better align with market fundamentals. While the current rising interest rate environment has led to correspondingly higher market cap rates for most property types, market cap rates for office assets have increased notably, suggesting a widening in the risk premium for the sector, presumably due to weakened fundamentals and performance from reduced demand caused by hybrid and remote work arrangements. Given the continued "flight to quality" within the office segment, as well as some assumed base level of office need/demand, we expect class A office performance to improve with time, while class B stock may see a long-term decrease in demand.
Accordingly, we have raised our cap rates for class B office assets by 100 basis points. In addition, our cap rates for class A and B office assets, as defined by S&P Global Ratings, are now showcased in prescribed ranges as opposed to spot assumptions based largely on location in furtherance of allowing us to make analytical judgments about asset quality.
While loans on class B office assets are common in conduits, we currently rate 70 single-asset single-borrower (SASB) and three large loan (LL) transactions secured by mortgage debt on office properties. However, only five SASBs are backed by class B office assets (as defined by S&P Global), five SASBs are backed by a mix of class A and B office assets, and six are backed by a mix of office, retail and/or industrial assets.
We anticipate CreditWatch negative placement actions resulting from our revised cap rates to be published in a timely fashion and any eventual rating actions thereafter to be typically in the one–three notch range and mainly affect our SASB exposure given their concentrated nature. While some conduits will also be affected, transactions that have experienced loan paydowns, defeasances, or principal amortization may see fewer rating actions than the one-three notch range noted above.
This report does not constitute a rating action.
The report is available to RatingsDirect subscribers at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box at www.spglobal.com/ratings.
| Primary Credit Analysts: | Senay Dawit, New York + 1 (212) 438 0132; senay.dawit@spglobal.com |
| Mathias Herzog, Frankfurt + 49 693 399 9112; mathias.herzog@spglobal.com | |
| Yuji Hashimoto, Tokyo + 81 3 4550 8275; yuji.hashimoto@spglobal.com | |
| Secondary Contacts: | James C Digney, New York + 1 (212) 438 1832; james.digney@spglobal.com |
| Ryan Butler, New York + 1 (212) 438 2122; ryan.butler@spglobal.com | |
| Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com | |
| Criteria Contact: | Andrew O'Neill, CFA, London + 44 20 7176 3578; andrew.oneill@spglobal.com |
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