Esoteric Assets Prevail in European CMBS

This commentary discusses the growing esoteric nature of the underlying collateral in a changing commercial real estate market and the impact it has on CMBS transactions and their credit analyses. Esoteric property types are generally more operational in nature and the real estate may be purpose built, in contrast with owning and renting out traditional commercial space.

Key highlights include:
-- Against the background of considerably less European commercial mortgage-backed securities (CMBS) issuance since the Global Financial Crisis, European CMBS transactions backed by non-standard property types have stood out among more typical asset classes such as retail, office, logistic, and multifamily.

-- Specialised institutional borrowers owning portfolios with real expertise in their field offer something more to the real estate fundamentals and we have seen a number of their success stories over recent years.

-- We believe the continued growth in artificial intelligence (AI) and technologies supporting AI will create strong demand for data centres over the next decade, and growth in this sector will be comparable with what was seen with last mile logistics.

“Esoteric property assets have played an important role in European CMBS and we believe they will continue to do so. Underwriting measures are complex but, given the performance of the recent esoteric transactions in European CMBS, we can conclude that, even in the current environment of high inflation and higher interest rates, specialised assets with the right sponsors and operators who are committed to their businesses will show resilience even as some non-esoteric assets, such as office transactions, struggle”, said Dinesh Thapar, Vice President of European CMBS. “Amidst a challenging economic environment, changes in corporate and consumer behaviour and increasing demand for ESG-compliant real estate, operational and/or mixed-use assets are likely to become more necessary, and the quality of the asset managers will be more relevant. We believe more esoteric assets will emerge into CMBS and, as these asset types mature, they will fall into the non-esoteric classification”.