While the office property sector has generated a surplus amount of attention from anxious lenders and investors, a new warning from Fitch Ratings insisted the risks from higher interest rate encompasses the wider commercial real estate (CRE) market.
“The roughly $3 trillion-plus commercial office sector is one of the largest CRE property types, but still only comprises a low-teen percentage of the total estimated U.S. CRE value,” stated Fitch. “Enclosed retail, full-service hotels and multifamily are property formats with higher refinance risk that also warrant scrutiny.”
Fitch acknowledged that “property fundamentals, including tenant demand and prevailing market vacancy rates, must generally still be healthy for landlords to have pricing power, regardless of broader economic inflation levels. This is a key reason behind the disproportionate pressure on office CRE, given historically high vacancies and availability in many markets and secular demand pressure from flexible work.”
However, Fitch also pointed to a recent refinance scenario analysis of U.S. CMBS transactions that showed loans backed by retail, hotel and mixed-use properties all carried a higher refinancing risk than office.
“Indeed, the percentage of office loans able to refinance exceeded the average across all property types for all three scenarios,” Fitch added. “Within office, urban properties outperformed suburban and medical office in terms of the refi percentage, notwithstanding the former’s acute exposure to remote work. Most retail formats, not just malls, face greater refi risk than the office sector average. Weak business transient travel continues to challenge urban, full-service hotels. Lastly, although multifamily had below-average risk, the smaller conduit subset showed above-average refi risk that exceeded most office types.”