The COVID-19 pandemic is receding, but its impact on U.S. single-asset single-borrower (SASB) commercial mortgage-backed securitizations (CMBS) will likely continue. We believe transactions backed by retail, lodging, and office collateral are most at risk for negative rating actions. But the outcomes may vary by markets, submarkets, and even at the individual property level, especially for office-backed transactions.

Common Themes…

We recently reviewed several SASB transactions, mostly from those three sectors, due to concerns about the lingering effects of the pandemic. Where we saw the potential for sweeping changes to long-term value, our review resulted in downgrades of senior bonds, in addition to junior bond downgrades (see table).

For retail, although ecommerce sales growth figures are off post-pandemic highs, we believe their inevitable continued growth and property competition, in general, for sales will continue to create challenges for certain malls. Moreover, despite a recent uptick in foot traffic and in-person sales, many retail establishments already appear to be coming off those sales as well. Lodging performance has broadly improved from pandemic lows, but not all property types and locations have recovered at the same pace. For instance, properties that depend heavily on corporate transient travel and meeting and group demand have recovered at a markedly slower pace than those that depend on leisure travel. Hotels in major urban markets are also recovering slowly.

The future of office is the most uncertain of the three sectors. We expect overall occupancy and demand levels to decline, compared with pre-pandemic levels, due to the rise in hybrid work arrangements (see "U.S. CMBS: Remote Work And The Evolution Of Manhattan's Office Market," published Feb. 3, 2022). However, the ultimate magnitude of this shift may not be entirely clear for years, mainly due to the longer term leases common in the office market.

But Different Results

Despite these common themes, transaction performance and the credit impact have varied, sometimes widely, especially within the lodging and office property types. However, the outcomes have been more consistent with retail.

Retail

Of the transactions listed in the table above, the rating actions on malls have been the most severe, on average. We lowered multiple ratings on classes rated 'AA-' or higher in each of the four retail transactions we reviewed: MSBAM 2012-CKSV, BB-UBS 2012-TFT, UBS-BAMLL 2012-WRM, and DBJPM 2016-SFC. It is worth noting that, unlike lodging and office properties, malls were under stress before the pandemic. In addition, the fundamental paradox for malls that are no longer considered 'A' quality remains: Although these malls are still able to generate considerable cash flow--often with debt yields near 10%--lenders are generally unwilling to provide nonrecourse capital to refinance mall-backed loans that have near-term maturities, given their long-term cloudy outlook. This lack of liquidity continues to burden the sector and is a factor we considered in some of our rating actions.

Lodging

Here we begin to see some bifurcation in both performance and outcomes, with some lodging transactions seeing downgrades on highly rated classes and others experiencing affirmations across their respective rated classes. Five transactions saw downgrades (JPMCC 2018-ASH8, BAMLL 2017-SCH, UBSCM 2018-NYCH, HMH 2017-NSS, and NOHT 2019-HNLA), while three saw only affirmations (WBHT 2019-WBM, AFHT 2019-FAIR, and WFCM 2017-HSDB). In general, the main differentiator between the two groups is that the collateral backing the downgraded classes relies more on corporate transient travel and meeting and group demand, and the affected properties are located mainly in urban centers such as New York, Chicago, New Orleans, Minneapolis, and Portland, Oregon. The New York market in particular continues to experience weakness in international demand as well as oversupply issues that predate the pandemic.

As of April 2022, the lodging sector's overall year-to-date revenue per available room (RevPAR) surpassed the year-to-date April 2019 pre-pandemic levels. RevPAR levels for April and March 2022 both exceeded the April and March 2019 levels by 10.2% and 4.0%, respectively. We expect that year-end 2022 RevPAR levels will be flat to 10% higher than 2019 levels (see "U.S. Lodging Trends Move Toward Normal As Macro Risks Rise," published May 4, 2022). However, although RevPAR has rebounded, we have also started to see instances where increased expenses are offsetting some of that growth, particularly in rooms expense, real estate taxes, and insurance.

In addition, several hotel types are recovering at a slower pace despite the industrywide improvements in RevPAR, and we note that property type and location need to be assessed when looking at individual assets. For instance, upper upscale and upscale hotels are still performing significantly below their 2019 pre-pandemic levels, and hotels in urban and airport markets have continued to struggle. Limited-service and extended stay hotels remain the best performing, along with resorts and smaller market locations.

Office

We see the most variance in recent rating actions in the office sector. This variance reflects numerous factors, including tenant mix, leverage levels, land value, location, and risks from existing or near-term lease rollovers.

Below we briefly summarize the rating action outcomes:

• BXP 2017-CC saw affirmations across all respective rating categories. Although occupancy fell during the pandemic, there was some recent positive momentum, and the property has no significant roll until 2028. Similarly, MSC 2015-420 and DBWF 2016-85T both had six classes affirmed due to a slight improvement in occupancy and relatively low leverage, among other factors.
• VNDO 2016-350P and CALI 2019-101C saw rating actions only on their speculative-grade (rated 'BB+' or lower) classes because the underlying assets would have to experience significant market value declines for principal losses to occur. Similarly, GSMS 2017-485L and COMM 2016-667M, which are both located in Manhattan, face some challenges from declining net cash flow.
• MSC 2018-BOP saw a one-notch downgrade on its 'BBB-' rated class D certificates due to softened office submarket fundamentals due to lower demand and longer re-leasing timeframes as more companies adopt a hybrid work arrangement. However, the transaction also benefitted from the significant market value decline that would need to occur before the more highly rated classes experience principal losses.
• MSDB 2017-712F and COMM 2019-521F saw downgrades of a 'A-' rated class and a 'BBB-' rated class, respectively. Although both transactions have experienced declines in occupancy levels, they both also benefit from high land value and their location in Midtown Manhattan.
• BWAY 2015-1740, GSMS 2018-RIVR, JPMCC 2018-PTC, and GSMS 2018-TWR saw downgrades among the 'AA-' and higher rated classes. They face relatively lower occupancy levels and rents (lower net cash flow), as well very high leverage, in our view, in what we believe will likely be a tough environment to re-lease vacant space.

Conduits

Like SASB transactions, performance deterioration in mostly retail, lodging, and office assets have resulted in negative rating actions on some U.S. conduit CMBS, especially those that have paid down considerably and are burdened by adverse selection. Although these rating actions have generally affected classes rated 'BBB+' and lower, there were also instances where ratings were affirmed across all respective categories. We will continue to monitor these trends and the potential credit impact they could have on class B office loans, especially top 10 loans.

Related Research

• U.S. Lodging Trends Move Toward Normal As Macro Risks Rise, May 4, 2022
• U.S. CMBS: Remote Work And The Evolution Of Manhattan's Office Market, Feb. 3, 2022