European CMBS Bracing for the Interest Rate Storm in Post-COVID World

This commentary provides an overview of the performance of the approximately EUR 19.4 billion publicly distributed CMBS transactions, which have been originated in Europe since 2017 (EUR 9.6 billion still outstanding), when European CMBS re-emerged after the great financial crisis and started to be used more consistently again as an alternative source of funding for commercial real estate.

Key Highlights
-- The logistics and industrial real estate sector in Europe has grown significantly over the past 15 years and still counts as one of the most dynamic sectors of CRE, with expectations for further growth, although at a slower pace.
-- Flexible working patterns and online shopping have reduced demand for office space in noncore locations and/or in older buildings and for brick-and-mortar retail space. Therefore, we see that restructurings and defaults incurred by European CMBS issuances are all concentrated among the EUR 3.2 billion and EUR 1.2 billion loans backed by office and retail properties, respectively.
-- Esoteric asset types, such as hospitality and student accommodation, play an increasing role within the European CMBS sector.

According to Mirco Iacobucci, Senior Vice President, Sector Lead, European Real Estate Ratings at Morningstar DBRS, “There are challenges and trends for outstanding and future European CMBS transactions as we get closer to a potential turning point for the CRE sector, given central banks seem to be on the verge of highly anticipated base-rate cuts. This would represent a substantial switch from the recent monetary policy of most central banks, which had to resort to numerous rate hikes in a very short period to contain inflation. Higher interest rates consequently dampened the CRE market.”