More than two and a half years since the onset of the pandemic, there is growing conviction that the office sector may remain relatively more impaired than any other sector within the sphere of commercial real estate, even as social distancing measures have been largely removed. Although the lodging sector was more acutely affected initially, as evidenced by higher commercial mortgage-backed securities (CMBS) delinquency and forbearance rates, this sector has rebounded faster than preliminary expectations. Even the brick-and-mortar retail sector–despite preexisting pressure from ecommerce, which only intensified after the pandemic and still leaves many retail malls vulnerable–was able to recover as social distancing measures eased and in-person consumer spending rebounded significantly. While both these sectors have benefited from increased utilization and foot traffic, many office buildings, both in central business districts and suburban settings, remain deeply underutilized, suggesting that once-deemed “temporary” workplace arrangements have become more permanent (or at the very least hybrid) in nature.
In light of this, along with market feedback regarding, in particular, the outlook for conduit loans backed by class B quality office assets, S&P Global Ratings has taken a closer look at how office valuation declines may affect our rated universe of CMBS conduits. A report published Oct. 20, 2022, titled “Exploring The Potential Impact Of Office Value Declines Beyond The Base Case In U.S. Conduit CMBS,” presents scenario analyses that focus on various assumptions for office value declines (which translate to higher default probabilities and lower recoveries) to determine how enhanced term and maturity default risks may affect credit ratings. These stresses are on top of S&P Global Ratings’ expected case office recovery values that are already 40.6% lower than issuance market values on average.
Super senior classes, on average, appear relatively insulated to our stresses, with more potential downward rating movement present in ‘A’ and ‘BBB’ rated classes in our more severe scenarios.
This report does not constitute a rating action.
The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-7280 or sending an e-mail to [email protected]. Ratings information can also be found on S&P Global Ratings’ public website by using the Ratings search box located in the left column at www.standardandpoors.com.