Huge Jump In Negative Leverage For CMBS Loans Bodes Ill For Property Values

This year's rapid interest rate hikes, combined with cap rate movements, put the squeeze on commercial real estate, with about $5.5B, or 28% of new CMBS issuance, suffering from negative leverage during the third quarter of 2022, according to a report by Moody’s Analytics.

For those deals, the cost of debt exceeds projected returns on investment.

The amount of CMBS exhibiting negative leverage was only 8% in the second quarter of this year, Moody's noted. During Q3 2021, the total was a mere 2%.

The third-quarter jump was seen across asset classes, but industrial and multifamily have the largest share by count, at 35.9% and 30.8%, respectively, Moody's reported.

Negative leverage will produce a cascade of ill effects on commercial properties, most immediately lower loan-to-value ratios and a slowdown in lending and trading volume. Eventually, the trend will lead to downward pressure on asset values, according to Moody's.

“Ultimately, negative leverage will drive bid prices lower,” Kevin Fagan, head of commercial real estate economic analysis for Moody’s, told Bloomberg.

CMBS loan interest rates grew between 75 and 175 basis points between the first and third quarters of 2022. At the same time, multifamily cap rates were down slightly in Q3, but there was a moderate increase for industrial, office and retail assets.

Continue reading this story with a free account

Log in or register
Sign up for more articles like this
Subscribe to Bisnow's National Newsletters
Related Stories

Interest Rate Hike Douses Outlook For Atlanta Developers

The Bridge-To-Bridge Bet Is Holding Off CRE's 'Day Of Reckoning' — For Now

Augmentation, Not Replacement: How AI Platforms Are Streamlining Front Desk Teams

Lawmakers Punt On Stripping Approvals From 15 Projects In Data Center Alley

Success Of Top-Tier Malls Masks Enduring Distress In Sector's Underbelly

HUD Launches Investigation Into Wells Fargo's Efforts To Support Black Homeownership

Delaware Statutory Trust Fundraising Jumps 27% From 2025

Bank OZK Shares Drop After Citi Flags $915M Mortgage Concern

Activist Investor Buys Stake In Empire State Building Owner

Soaring Yields Strand REITs In M&A No-Man's-Land

How UK Investment Giant L&G Plans To Grow Its U.S. Multifamily Holdings

Properties Owned By REIT Accused Of Fraud To Be Auctioned Off