Moody's said commercial real estate transactions are gradually recovering.
The company cited the continued slump in the office sector, where vacancy rates are at record high levels.
KKR said improved conditions are an opportunity for credit investors.
The beleaguered commercial real estate market may finally be moving in some directions, according to recent data.
According to Moody's analysis, the decline in trading volume has bottomed out, with year-on-year sales volume now positive for the first time in two years. In the second quarter, transaction value across the four core real estate sectors reached $64 billion, an improvement of 9%.
That's not to say everything is bright. The credit rating agency pointed out that the office space market continues to be sluggish, with the vacancy rate hitting a record high of 20.1% last quarter. However, domestic office utilization increased enough to stabilize the market.
As remote work becomes more entrenched as part of American corporate culture, post-coronavirus norms have become a major source of tension in the office sector. Fewer employees were using the office space, and the building lost tenants. This left owners with debts that were difficult to repay, made worse by high interest rates and tightening bank lending. Defaults are not uncommon.
Still, loan volumes have improved slightly, Moody's said.
Mortgage originations increased 3% year-over-year in the second quarter, helped by commercial mortgage-backed securities. In the same quarter, it jumped 155% on an annual basis.
Moody's expects bank lending to turn positive by the end of 2024. That may be welcome news for Wall Street, as concerns grow over a looming wave of hardship for small dealers. Because these institutions have the highest exposure to commercial real estate, some analysts say hundreds of banks are at risk of failing over the next few years.
Some people are currently seeing opportunity in the real estate market.
KKR analysts agreed that conditions in the sector have bottomed out, but expected bank market participation to be limited going forward. If these dealers cut their lending to 30% of the market, there would be a $300 billion gap, the company said.
“We believe this year will be an attractive time for real estate credit,” analysts Matt Salem and Dakota Sagnelli wrote, later adding, “An increase in commercial real estate transactions will increase lending opportunities. Meanwhile, the lack of banks should increase lending opportunities.''Capital needs to maintain attractive yields and increase spreads relative to corporate credit. ”
For example, KKR focused on the B-level spread. Commercial mortgage-backed securities It had expanded by 400 basis points since 2022.
For investors concerned about risks, analysts said valuations had been reset. Meanwhile, funds owed by the market were 30% lower than in the first quarter of 2022, when prices were near their peak.
“For lenders, this means a greater capital cushion and lower overall debt burden,” the note said. “We often lend at about 50% of peak appraised value.”
Read the original article on Business Insider
