KBRA Releases Research – Coronavirus (COVID-19): CRE Recovery Clues From the Great Recession and China

Kroll Bond Rating Agency (KBRA) releases its CRE Recovery Clues From the Great Recession and China report.

While past economic dislocations are not necessarily indicative of how the unprecedented situation with COVID-19 will play out, KBRA provides a review of how the major property types performed one year prior to the start of the Great Recession (December 2007) through 2015. For this time period, KBRA reviewed rent and occupancy data for each property type, post-recessionary recovery times, and cumulative default rates. KBRA also looked overseas to China, which is reportedly in its early stages of recovery, to see if any insight can be gleaned for commercial real estate (CRE) in the immediate aftermath of COVID-19 in the U.S.

Given current unemployment trends, the prospect for increasing numbers of joblessness, and a worsening economy, KBRA anticipates weakness across all CRE sectors in the months following the country’s economic restart. While the stimulus may help shield some of the financial damage to CRE, it will not prevent large numbers of special servicing transfers and defaults in the coming months.

There are no real bright spots to report, and even if there is a “U-shaped” economic recovery, KBRA now expects that CMBS delinquencies will easily meet or exceed those following the Great Recession. The CMBS delinquency rate—which held below 2% prior to the Great Recession, according to the National Association of Insurance Commissioners (NAIC)—peaked at 10.34% in July 2012 (almost four and one-half years later), based on Trepp data.

On March 17, FedEx reported that 90%-95% of large manufacturers in China are now back to work in some capacity and 65%-70% of small businesses are resuming activity. In addition, according to a CBRE report on March 18, some 80% of China’s shopping centers have reopened and it took about six weeks for hotel demand to stop falling and begin to rise. On April 2, STR reported that average hotel occupancy for China rose to 31.8% on March 28, up from a low of 7.4% during the first week of February. STR also reported that about 87% of hotels in China have reopened.

While the Great Recession and third-party reports of China’s early recovery may provide some guidance for the U.S. after the worst of COVID-19 passes, the lasting effects of how people live, work, and play will have a long-term impact on CRE.

Click here to view the report.

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About KBRA and KBRA Europe

KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe Limited is located at 6-8 College Green, Dublin 2, Ireland.

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