Rising interest rates and stubbornly high inflation continue to take their toll on commercial real estate, and credit rating firm Fitch Ratings expects more commercial property owners will fall behind on commercial mortgage-backed securities loan payments over the next year.
Fitch predicted the CMBS delinquency rate will increase to 4.5 percent in the next year, up from its existing 1.89 percent rate. Worsening economic conditions could push up defaults, but Fitch said the delinquency rate is unlikely to rise above the 4.89 percent rate it reached earlier in the pandemic. One primary reason for this is that special servicers are leaning toward forbearance rather than foreclosure.
Many predict commercial real estate lenders’ sentiment will end eventually, as there have been some notable examples of office properties being foreclosed on. However, Fitch noted there hasn’t been a wave of distress yet. Fitch expects all commercial real estate asset classes to be impacted next year. In the office sector, the persistent flight to quality trend will affect the performance of older, vintage office properties. Fitch also predicts a mild recession to hit the U.S. in mid-2023.
Real estate owners in all asset classes are hunkering down for leaner times, as several recent reports are detailing the financial stress in the industry. According to Colliers, the commercial market is in a definite slump, with investment sales volume for the third quarter down 19 percent year-over-year. And while inflation has cooled somewhat, New York Federal Reserve President John Williams said recently the central bank still has a way to go to decelerate prices to its 2 percent target level, not welcome news for real estate owners and investors.