European CMBS 2023 Outlook
This commentary highlights DBRS Morningstar’s expectations of a challenging 2023 for the commercial real estate (CRE) market and the commercial mortgage-backed securities (CMBS) sector. Inflationary pressure in 2022 forced central banks to increase interest rates, which translated into rising refence rates, such as Sonia and Euribor. CRE markets and CRE debt are sensitive to interest rates as long-term interest rates largely determine CRE valuation yields while the prevailing interest rate determines the cost of financing the purchase of properties. As a result, the rising interest rate environment increases refinancing costs and negatively affect property values, with a subsequent increase in loans' default risk at maturity.Considering the maturity profile in European CMBS (i.e., the next maturity of extendable loans and fully extended maturity dates), our credit outlook for the sector is negative and we expect more loans to be transferred into special servicing during 2023.
The market volatility caused by economic and policy factors negatively affected European CMBS issuance last year as only four public transactions were placed in 2022 versus 15 in 2021. We think that the European CMBS new issuance market is likely to remain subdued in 2023, especially in the first quarter. The expected stabilisation of interest rates and spreads during the year may open windows for new issuance and we forecast a maximum of seven transactions in 2023 for a total amount of EUR 2.5 billion to EUR 3.0 billion.
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