Falling oil prices represent a moderate credit negative for commercial mortgage-backed securities collateral and will cause performance to deteriorate in some metros, according to Moody’s Investors Service, New York. But a number of mitigating factors should limit the harm, including limited CMBS exposure to oil metros, economic diversity in many oil metros, limited commercial real estate supply growth and generally strong property- and loan-level fundamentals.
“Oil slumps affect commercial real estate most directly by reducing demand for commercial space, typically occupied by oil-related employees,” Moody’s said. In markets such as Houston and North Dakota’s energy-producing counties, construction driven by the oil boom inflated commercial real estate supply just as absorption began to decline. “This combined effect, on average, lowers occupancy rates and rents in energy metros, which is particularly stressful for loans with low debt-service coverage ratios or those scheduled to mature in the near term,” Moody’s said.
Kroll Bond Rating Agency, New York, examined Houston’s performance and reported that falling oil prices shook up the nation’s tenth-largest office market. Houston ended 2015 with 13.5% vacancy in office properties, up 2.6 points year over year and the largest annual increase since 1999. The U.S. office sector averages 10.4% vacancy.