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CREFC's Compendium of CRE Commercial and Multifamily Real Estate Statistics

September 30, 2022

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CREFC's August 2022 Monthly CMBS Loan Performance Report

September 27, 2022

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CRE Finance Council in the News

September 26, 2022

Last week, CRE Finance Council’s David McCarthy was quoted in Wealth Management’s story, “How Are CRE Lenders Responding to the Fed’s New Loan Workout Recommendations?”

Our thought bubble: Responding to the Fed’s proposed new loan workout, David is quoted as saying:

“If banks are able to make short-term accommodations without having to negatively classify or downgrade these loans on their books and take either a reserve or accounting hit on them, that could make it less costly to work out some of these temporary blips on the short-term accommodations,” says McCarthy, who refers to it as a positive for both lenders and regulators.

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CMBS Delinquency Rate Drops Below 3%

September 26, 2022

• Following a 15 basis point decline in July, the CMBS delinquency rate fell eight basis points (bps) in August to 2.98%. This marks the first time since the start of the pandemic that the rate was below 3%.
• Loans in special servicing, however, rose 12 bps in August to 4.92%, marking the first increase after 22 consecutive monthly declines. Nonetheless, the rate remains well below its high of 10.48% in September 2020. Retail and multifamily loans drove the increase, rising 114 and 67 bps to 11.03% and 1.90%, respectively. All other property types saw decreases.

While too early to declare a trend, the uptick in the special serving rate in August may reflect the challenges of refinancing loans in the current rate and economic environment.  We anticipate some increase in loans transferred to special servicing in the coming months.

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SEC Investor Advisory Committee Recommends More Climate Risk Disclosure

September 26, 2022

On September 21, the SEC’s Investor Advisory Committee (IAC) shared its support of the SEC’s May 2022 climate risk disclosure proposal and recommended a couple of additional disclosures. (The IAC is not part of the SEC. It was established by Dodd-Frank to advise the SEC on a variety of topics, including the effectiveness of disclosure and initiatives related to investor protection. Please see here for current IAC members.)

In addition to encouraging the use of the Task Force on Climate-Related Financial Disclosures (TCFD) framework and the GHG Protocol, the IAC supports requiring:

• Disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions, and disclosure by large companies of material Scope 3 GHG emissions;
• Attestation report for accelerated and large accelerated filers at the reasonable assurance level for Scope 1 and Scope 2 emissions;
• Disclosure of climate-related risks and impacts on business strategy, model, and outlook;
• Disclosure of risk management, targets, and goals; and the
• Presentation of disclosures in financial statements.

The IAC also recommends that companies:

• Provide a “Management Discussion of Climate-Related Risks and Opportunities” in the annual 10-K. (This information need not be audited or subject to internal controls over financial reporting); and
• Disclose material facility locations, including owned facilities and facilities used by key suppliers.

What's next: According to the SEC’s agenda, the climate disclosure rules will be finalized in October 2022, although market participants believe this deadline might slip.

• The SEC has received tremendous pushback from many parties, including several key Republican lawmakers, and will likely faces a slew of lawsuits upon the publication of the final rule.
• However, it is hard to gauge how much SEC Chair Gary Gensler will pull back on the proposed requirements.
• At a recent Senate Banking Committee oversight hearing, he stayed the course on some of the more controversial elements, including GHG emissions reporting requirements.
• CREFC will keep you apprised of any developments.

Please click here for CREFC’s response to the climate disclosure proposal and contact sburki@crefc.org with any questions.

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Issuer Forum Highlight

September 26, 2022

Together, David, Jane and Dan form the “Leadership Working Group” for the Issuers Forum set agendas and priorities for the forum, as well as represent the constituency on CREFC’s Policy Committee.

Key Issuers Focus Areas

• Improving competitive positioning of securitized lenders, especially in light of significant interest rate and credit spread volatility
• Enhancing transparency within the CMBS market both pre- and post-securitization with a current emphasis on standardizing disclosure and reporting across the CRE CLO sector
• Maintaining open dialogue with other market participants to help promote responsible lending, including incorporating feedback on structural and documentation enhancements necessary to improve both the borrower experience and loan performance
• Balancing conduit pools to account for evolving investor preferences across property types and other credit concerns
• Ensuring that we proactively manage regulatory changes such as LIBOR transition and also retrospectively evaluate previously implemented regulatory measures such as risk retention to determine if any modifications would be beneficial

Looking ahead, leaders are concerned that recent volatility in rates and deteriorating capital markets conditions may disproportionately impact CMBS issuance in the near term. That said, we remain focused on improving transparency, liquidity, and performance to best position the sector to capitalize on opportunities and grow market share as conditions stabilize.

What’s Next: Forum Leaders are planning a virtual forum wide legislative and regulatory policy update and will soon be formulating the agenda for CREFC’s January Conference.

To join the Issuers Forum, please register here. For any forum related questions, please contact Kathleen Olin (kolin@crefc.org).

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House Republicans Focus on Four Themes in 2023

September 26, 2022

Around 50 days before the midterms, House Republicans released their vision for the next Congress — ‘Commitment to America.’ Rather than a specific agenda, Republicans plan to focus on four themes if they win a House majority:

1. The economy, focused on reducing inflation and energy costs and strengthening supply chains
2.  Safety, including reducing crime and securing the border;
3. Freedom, which relates to parental rights in schools and confronting big tech; and
4. Government accountability, “a nod to planned scrutiny of Biden administration officials,” reports The Wall Street Journal, which notes:

Why it matters: To many Republicans, the platform feels like a turning point for their conference after four years stuck in the House minority, echoing their strongest campaign-trail points, Politico says.

Yes, but: President Joe Biden called the plan a “thin series of policy goals with little or no detail,” while House Speaker Nancy Pelosi described it as an “alarming new extreme MAGA platform,” citing the abortion stance and other parts of the proposal.

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Government Shutdown Unlikely But Down to the Wire

September 26, 2022

Permitting reform continues to hold up a Continuing Resolution (CR) to fund the government past Friday’s fiscal year deadline. A test vote in the Senate on Tuesday will determine whether the CR includes permitting reform.

Why it matters: The government is at low risk of a shutdown, but lawmakers are down to the wire.

The big picture: Permitting reform supporters say the federal permitting process for both fossil fuel and renewable energy projects (like electric transmission) come with too much red tape under the National Environmental Policy Act, Clean Water Act, and Endangered Species Act. This red tape prevents projects that create jobs, increase domestic energy production, and make the US energy-independent.

Yes, but: Reform opponents fear fewer and less robust environmental reviews, harming low-income communities of color who suffer from pollution by fossil fuel projects in their neighborhoods.

What's next: If the CR does not include permitting changes, lawmakers could add the provisions in a year-end omnibus spending bill or must-pass defense bill later this year.

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New MetLife Study Looks at Historical Performance of Commercial Mortgages

September 26, 2022

On September 20, MetLife Investment Management (MIM) published a report which examined the longest-known dataset of commercial mortgage loan performance, ranging from 1957 – 2021. The report is an update and expansion of a 2005 report, “Case Study of Leverage and Default Risk over a Full Real Estate Cycle,” published by Moody’s and based largely on MIM’s commercial mortgage-portfolio history. 

Like its previous study, the current analysis showed that while the position in the economic cycle when a loan is underwritten is important, the critical factor is LTV. The analysis shows, not surprisingly, that loss rates from higher-leverage loans can increase substantially if underwritten late in an economic cycle. In contrast, loans with more conservative leverage ratios present similar levels of risk no matter when in the cycle they are underwritten.

Besides LTV, the report looks at other underwriting metrics, specifically DSCR and debt yield. The authors note that DSCRs can be deceptive as longer payback periods or lower interest rates can produce higher DSCRs that are not truly indicative of the loan’s risk profile if there is a market downturn and/or a foreclosure. Debt yield, however, can be a more meaningful measure than DSCR in some instances and offers a lender a more standardized view of risk as it indicates potential returns if the lender had to take possession of the property.

The study then examines the relationship between debt yield and cap rates and concludes that the relationship between the two is a more effective tool for mitigating losses. The authors’ analysis shows that loans with smaller differentials between debt yields and cap rates have higher loss rates. As a result, the report concludes that lenders should look at the debt yield relative to cap rates to better gauge losses across a range of economic environments and lender-risk profiles than debt yield alone. 

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