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Growing Macroeconomic Concerns Increase Downside Risk for CMBS

Although Fitch Ratings continues to rank the majority of North America CMBS loans as stable and property performance and cash flows continue to stabilize from their pandemic lows, the rating agency cites growing macroeconomic concerns.  

These include rising interest rates, high inflation, slowing economic growth and the prospect of the U.S. entering a mild recession in mid-2023. All are increasing the downside risks and CMBS asset performance may deteriorate in 2023, slowing the post-pandemic recovery, Fitch says. 
 
The majority of CMBS downgrades this year have been driven by higher loss expectations on lower-tier regional mall exposures with sustained or further performance deterioration and/or increased refinance concerns, and by specially serviced loans whose assets have additional valuation declines, worsening performance or an expected prolonged workout. All of the downgraded classes in the third quarter had Negative Watches or Outlooks, or already had a distressed rating prior to the downgrade. 
 
Fitch said some downgrades and Negative Outlook assignments for CMBS loans are tied to underperforming class B and C office loans as a contributory factor to already underperforming retail exposures and delinquent specially serviced loans. The rating agency expects a new normal of flexible work protocols that will temper office fundamentals and increase obsolescence risk for weaker properties.

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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