Commercial mortgage-backed securities (CMBS) loans secured by real estate with a single tenant continued their upward trajectory in early 2021, with more than half of the risks associated with office assets, according to the new Kroll Bond Rating Agency the report was released on Wednesday.
CMBS loans to one tenant accounted for 21.9% of KBRA-rated transactions at the end of the first quarter after breaking the 20% threshold in 2020. Office tenants accounted for 51.4% of this population in 2020, and as of the beginning of 2021 – about 1.7. several times higher than in industry, which came in second with 30.4%, according to KBRA.
Analyst KBRA Larry Kay noted that 34% of loans to one tenant in the last 18 months expire before their final maturity, which creates an increased risk of default on securities. Office real estate accounts for 35.7% of these loans and 70% when accounting for debt with lease expiration 24 months after the loan maturity.
“For those leases that expire before the maturity of the loan, there may be structural features of the loan to mitigate the increased credit risk,” Kay wrote in the report. “These could include a box spring or a cash management mechanism if the tenant does not send renewal notice by the set date before the lease expires.”
In 2020 and 2021, five of the top six CMBS loan individual tenants are tenants that KBRA considers “worthy of high quality credit,” including Facebook, Amazon, Google, Walgreen as well as Leidos Biomedical Research… Google, which accounted for 5.5% of loans to a single tenant, closed several deals to sell its property in Moffett Towers Buildings on the 1020 Enterprise Way in Sunnyvale, California., according to Kay.
Thirty-eight percent of CMBS exposure for single tenant offices is in markets that KBRA defines as Tier 1, which includes New York, Washington DC, Los Angeles, Boston, Chicago, and San Francisco. Kay said that while these areas provide “superior liquidity” compared to the rest of the country, major markets continue to see higher vacancy rates during the COVID-19 pandemic amid increasing trends in work from home.
“While teleworking will inevitably affect the use of space — especially for companies looking to offer full teleworking — many companies will also use hybrid structures that require staff to be in the office two to four days a week,” Kay wrote. Companies using these structures may not be able to significantly reduce space; in general, the downward trend in square footage per employee may also subside after a pandemic. ”