Commercial Mortgage-Backed Securities Single-Tenant Loans on the Rise

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Commercial mortgage-backed securities (CMBS) loans secured by single-tenant properties continued their upward trajectory in early 2021, with more than half of the exposure tied to office assets, according to a new Kroll Bond Rating Agency report released Wednesday.

CMBS single-tenant loans accounted for 21.9 percent of KBRA-rated deals, as of the end of the first quarter, after piercing the 20 percent threshold in 2020. Office tenants comprised 51.4 percent of this universe in 2020 and early 2021 data — around 1.7 times higher than industrial, which came in second at 30.4 percent, according to KBRA.

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KBRA analyst Larry Kay noted that 34 percent of single-tenant loans over the last 18 months expire prior to their final maturity, posing increased default risk over the course of the securities. Office properties consist of 35.7 percent of these loans, and 70 percent when factoring in debt with lease expirations 24 months past loan maturity.

“For those leases that expire prior to loan maturity, there may be loan structural features to mitigate increased credit risk,” Kay wrote in the report. “These may include a springing lockbox or cash management arrangement if a tenant fails to give renewal notice by a set date prior to lease expiration.”

For 2020 and 2021, five of the top six single tenants in CMBS loans are what KBRA deems "high quality credit worthy” tenants, including Facebook, Amazon, Google, Walgreen and Leidos Biomedical Research. Google, which accounted for 5.5 percent of the single-tenant loans, has multiple deals for its property at Moffett Towers Buildings on 1020 Enterprise Way in Sunnyvale, Calif., according to Kay.

Thirty-eight percent of office single-tenant CMBS exposure are in markets KBRA defines as Tier 1, which includes New York, Washington, D.C., Los Angeles, Boston, Chicago and San Francisco. Kay said that while these areas provide "superior liquidity” compared to the rest of the nation, major markets continue to experience higher vacancy rates during the COVID-19 pandemic amid headwinds from increasing work-from-home trends.

"While remote work will inevitably impact space utilization—particularly for companies that are gravitating toward offering full remote work—many companies will also employ hybrid structures, whereby staff need to be in the office two to four days a week,” Kay wrote. "Companies utilizing these structures may not be able to meaningfully reduce space; generally, the trend toward less square footage per employee may also subside in the wake of the pandemic.”