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Credit rating firm Fitch Ratings is predicting more owners of commercial real estate will fall behind on payments on their commercial mortgage-backed securities loans over the next year.
The agency expects the CMBS delinquency rate will rise to 4.5% in the next year, up from its current 1.89%, Fitch said in a forecast this week.
A recession caused by rising interest rates and stubborn inflation could push up defaults, Fitch wrote, but it is likely to stay beneath the 4.98% delinquency rate hit earlier in the pandemic, with special servicers leaning toward forbearance, per the publication.
The rate is expected to be volatile in the first half of the year, and delinquencies are likely to impact all asset classes as the impacts of tougher economic conditions are felt. Even the multifamily market, which has benefited from increasing rents and low supply, will be affected, according to Fitch, as costs go up and rent growth slows.
A drop in spending could affect retail as occupiers opt for less space. Tighter travel budgets may hit hotels, although that asset class isn't expected to come close to its delinquencies at the height of the pandemic, which hit 18.4%.
Meanwhile, the bifurcation of the office market — in which tenants are opting for newer space — is likely to affect the performance of older products. In industrial, a widespread rationalization of industrial space is likely to take place, Fitch predicts, which has already been playing out in e-commerce giant Amazon’s strategy.
Throughout the pandemic, lenders were largely sympathetic to their borrowers and opted to make modifications to loans in order to avoid foreclosures. Many have predicted that practice will have an end date, but while there have been notable occurrences of some office properties being handed back to lenders, there hasn't been a wave of distress.
The severity of the recession, or if one will in fact take place, remains a matter of conjecture. Goldman Sachs put the chances of a recession in the U.S. at 35% and says it expects interest rates to hold steady next year.
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