U.S. PACE ABS 2024 Outlook

Morningstar DBRS has a stable credit outlook on the commercial property assessed clean energy (C-PACE) and residential PACE (R-PACE) sectors for 2024. We expect both portfolio-level delinquencies and losses on our rated securitizations in these sectors to remain low.

-- Outstanding C-PACE securitizations have performed well to date and low delinquency and low losses on the underlying PACE assessments are expected to continue despite a challenging commercial real estate market.
-- Pooled C-PACE and single-asset C-PACE origination volumes are expected to continue to grow given broader market acceptance from senior lenders, increasing availability from capital providers, and attractive relative value execution in the capital stack. However, significant headwinds include a historically uncertain commercial real estate market, an elevated interest rate environment, and broader macroeconomic challenges.
-- While the performance of outstanding R-PACE transactions is expected to remain stable with relatively low delinquencies and low losses on the underlying R-PACE assessments, expectations for the issuance of new R-PACE securitizations in 2024 are subdued.

“We expect the roster of approved states to continue growing in the coming years, especially as we see more progress in the major metropolitan cities,” said Stephanie Mah, Senior Vice President, Structured Finance Research. “We also expect to see first mortgage lenders become increasingly comfortable with having C-PACE loans senior to their own, which will allow more borrowers to diversify their capital stacks.”