Kroll Bond Rating Agency (KBRA) releases its Not All Sunshine: CMBS and State Economic Contraction, Out-Migration, and Taxes report.
During the Commercial Real Estate Finance Council’s (CREFC) annual conference in Miami last month, there was overwhelming optimism regarding CMBS credit conditions and the prospects for continued strong issuance. In many respects, it was well founded as the U.S. economy continued its record expansion through January with 127 consecutive months of economic growth. However, regional data reveal that economic growth can vary meaningfully depending on a state’s industrial profile, demographics, and tax policies.
Based on the Philadelphia Federal Reserve’s monthly projections released on February 4, 2020, six states including West Virginia, Pennsylvania, Missouri, Iowa, Maine, and Delaware could face an economic contraction over the next six months. Three other states in 2019, New Jersey, New York, and Connecticut, were among the top 10 states with the most out-migration for the fifth consecutive year, as well as some of the five worst business tax climate states.
A state’s business conditions, its population, and migration trends influence the area’s demand for tenant space as well as housing. Within this framework, KBRA decided to look at CMBS 2.0 and fixed rate Freddie Mac K-Series exposure in states forecast to face an economic contraction, as well as those that exhibit high out-migration levels.
In total, KBRA identified $167.6 billion of principal balance in the nine referenced states. It remains to be seen how these states perform relative to other states. Sources such as the Philadelphia Federal Reserve’s forecasts are certainly worth keeping an eye on, along with migration studies from United Van Lines and state business tax climate rankings from The Tax Foundation.
To view the report, click here.
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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) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
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