While the delinquency rate for office property CMBS has (so far) been contained, the acceleration of the work-from-home trend may reduce demand for office space and increase cash flow volatility.
But that’s easier said than done. The CMBS structure prohibits borrowers from taking on additional debt and includes a prepayment penalty clause, Federal Reserve Chair Jerome Powell pointed out.
The share of office properties in new commercial MBS is increasing and the use of upfront debt service reserves is fluctuating as issuers address the poor performance of outstanding deals.
The rating service its stepping away from rating new commercial MBS backed by single-borrower hotel loans due to uncertainty prompted by the coronavirus. Only one such deal has been issued since April.
The HOPE Act seeks to create a liquidity facility for commercial MBS borrowers who weren’t eligible for PPP or MSLP. The bill suggests financial institutions originate Treasury-guaranteed preferred equity instruments to qualified borrowers.
But another study found income overstatement commonly existed in commercial CMBS underwriting between 2013 and 2019, contributing to the rapid deterioration during the pandemic.