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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.
- ◦Financing
