By Matt Tracy
Issuance of securities backed by U.S. commercial real estate (CRE) loans posted a rare rebound last quarter, but sector struggles will likely persist through 2023, according to ratings agency DBRS Morningstar.
The third quarter saw roughly $3 billion in new collateralized loan obligations (CLOs) backed by CRE loans, according to a Friday report by DBRS.
This marks a significant turn from the second quarter, which saw less than $1 billion in CRE CLO issuance.
Despite last quarter's rebound, DBRS analysts noted they anticipate a dropoff in issuance volume in the fourth quarter, as challenges including elevated interest rates and vacancies persist.
"The modest spike in volume in the third quarter may have represented several quarters of origination volume by issuers, so with the latest transaction, it will take time for them to accumulate enough collateral for the next transaction," the analysts wrote.
Total 2023 issuance is likely to be less than $10 billion, well below market expectations, the report noted.
Office-backed loans represented almost half of all CRE delinquencies in the third quarter, according to DBRS. Office owners across the country continue facing several struggles, including the post-pandemic remote working trend.
However, loans on lodging properties saw the largest jump in delinquencies quarter to quarter, the report noted, jumping to 3.40% in September from 0.28% in June. Loans secured by self-storage properties saw the second-largest quarterly rise in delinquencies.
An overall 3.27% delinquency rate for CRE CLOs in the third quarter was roughly in line with the second quarter rate, according to DBRS. There were $2.67 billion in delinquent CRE CLO loans as of September, a $20 million increase from the second quarter.
"DBRS Morningstar is aware the current interest rate and investment sales environments have made loan refinancing and property sale exit strategies increasingly difficult for borrowers, and as such, expects the majority of borrowers will need to exercise built-in loan extension options," the report noted.
(Reporting by Matt Tracy; Editing by David Gregorio)