CMBS private label pricing volume was $5.1 billion in December, bringing fourth-quarter total volume to $18.1 billion. When the dust settled on 2018, private label CMBS issuance came in at $76.4 billion, 11.4% below 2017, according to a recent report by Kroll Bond Rating Agency.
Despite recent volatility in the broader capital markets, there are a number of transactions slated for the first quarter. These include up to a dozen single-borrower deals, eight conduits and as many as four commercial real estate collateralized loan obligations. To the degree volatility continues, however, it could dampen issuance activity, says Kroll.
Meanwhile, in Houston, oil prices remain key for the office sector. With oil recently falling to 18-month lows in late December, there are concerns that the recovery of the Houston economy could stall if oil’s market price remains below $50 per barrel for an extended period, according to the University of Houston’s Institute for Regional Forecasting. At these levels, the institute estimates that the region could lose anywhere from 10,000 to 20,000 energy-related jobs.
The Federal Reserve Bank of Dallas’ first quarter 2018 survey also noted that companies need oil prices at or above $52 per barrel to profitably drill new wells. With oil prices generally at levels not sufficient to justify drilling new wells, the mining and logging segment, which includes oil and natural energy workers, could see employment growth slow or even experience job losses. This would likely have an impact on Houston’s office demand-side fundamentals, which after experiencing increasing vacancies for 14 consecutive quarters, had falling vacancy rates in third quarter 2018 to 16.9% from 17.2% in second quarter 2018.
“We have identified 123 loans totaling $3.1 billion across 97 CMBS 2.0 transactions that have Houston office exposure,” Larry Kay, senior director of Kroll Bond Rating Agency, tells GlobeSt.com.
The five worst submarket clusters are 980 to 3,070 basis points above the national vacancy rate as of third quarter 2018, and include North Belt (40.6%), Westchase (23.2%), West Belt (22.2%), San Felipe/Voss (21.2%) and Katy Freeway/Energy Corridor (19.7%). Notably, two of the markets, Katy Freeway and Westchase, account for more than 10% of the office collateral within CMBS 2.0.
The Katy Freeway submarket’s preponderance of energy companies with offices along Interstate 10, include ConocoPhillips and BP Corporation. Each of these companies has office space in Two Westlake Park, which serves as loan collateral in WFRBS 2014-C24 (8.8% of principal balance), while ConocoPhillips also occupies and subleases space within Three Westlake Park, which was securitized in GSMS 2014-GC20 (8.9%).
“In both transactions, the loans were transferred to special servicing due to imminent monetary default in July 2018 and October 2018, respectively,” Kay tells GlobeSt.com. “While the oil sector could be reacting to the negative news that has permeated the markets about a potential slowdown in global economic growth, the oil market is still oversupplied. Although OPEC’s production cuts should improve the situation, it may take a while for the surplus to be worked off.”