Europe’s commercial mortgage-backed securities market is set to face “several challenges” over the course of 2023, according to the team at ratings agency DBRS Morningstar.
The agency has pegged rental markets in two of the five real estate sectors it covers as negative.
In an outlook note, the team said rising reference rates are lifting financing costs and denting asset values, increasing the risk of loan default at maturity.
“Considering the maturity profile in European CMBS considering next maturity of extendable loans and fully extended maturity dates, our credit outlook for the sector is negative and we expect more loans to be transferred into special servicing during 2023,” the firm said. “However, the lower leverage compared with before the great financial crisis should keep negative rating performance contained.”
It added: “The market volatility caused by economic and policy factors negatively affected European CMBS issuance last year as only four public transactions were placed in 2022 versus 15 in 2021.
“We think that the European CMBS new issuance market is likely to remain subdued in 2023, especially in the first quarter. The expected stabilisation of interest rates and spreads during the year may open windows for new issuance and we forecast a maximum of seven transactions in 2023 for a total amount of €2.5bn (£2.22bn) to €3bn.”
The agency’s ratings for industrial, multifamily and hospitality are all stable. However, the firm has a negative credit outlook for offices – particularly secondary assets.
“Vacancy rates in poor-quality offices and in weaker locations are increasing as occupiers cut costs and reduce inefficient space,” it added. “The existence of ‘grey space’ is sizeable in poorer-quality offices. Tenants will continue to shed excess floorspace in properties that do not meet corporate environmental and social requirements and will therefore as a whole occupy fewer higher-quality offices.”
It also marked retail with a negative rating, noting: “Higher interest rates, falling real household incomes, and the war in Ukraine are all weighing on consumer confidence.
“Higher unemployment is anticipated in 2023, meaning that consumers will prioritise essential spending and cut back heavily on discretionary items, such as fashion, consumer electronics, and home furnishings. In this context, tenant defaults will likely rise and retail rents will likely decline further.”
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