Securitization in Focus — September 2024

Asset-backed Securities

This year, issuance in the ABS market has surpassed 2023’s full-year production, reaching $257.3 billion compared to 2023's $256.0 billion.

ABS Issuance ($B)

The Rise of Data Center Securitizations

What are data centers?

Data centers are real estate facilities that house computer servers and network equipment within a highly secure environment with redundant mechanical, cooling and electrical power systems and network connections.

Wholesale data centers place the responsibility for managing the tenants' network and equipment on the tenant, whereas retail facilities offer varying levels of support and other services.

Retail facilities typically support tenants with shorter-term and smaller capacity needs. Data center leases, or customer contracts, are usually quoted by $/kW usage. The lease describes the tenant's power usage to operate the IT infrastructure.

Are data center securitizations ABS or CMBS?

They can be both.

ABS: Transactions are typically structured as master trusts, with the issuer able to add additional collateral (data center/MW capacity) to the trust and issue additional note series over time. The ABS market funds a range of data center types (wholesale, retail, hybrid) with multiple tenants.

CMBS: Deals are structured like typical Single Asset Single Borrower (SASB) transactions, where the collateral pool is established at issuance. The CMBS market has primarily funded hyperscale developments.

What are the key characteristics of data centers?

When assessing the value of a data center, several fundamental characteristics should be considered, including location, interconnectedness, age, power cost and tenant ecosystem. Customers weigh the cost-benefit analysis of reliability, reduced latency and interconnectedness against pricing, with the data center's location as a common denominator.

Issuance

The majority of the outstanding issuance is in ABS (74%, or roughly $23.9B), with the remainder (26%, or roughly $8.5B) in CMBS. The first ABS deal was in 2018, and the first CMBS deal was in 2021.

Liquidity

The rise in issuance has led to more data center ABS trading, yet liquidity remains thin. In 2023, the estimated secondary trading volume for data center ABS was $2 billion, compared to $231 billion across all ABS sectors.

Commercial Mortgage-backed Securities

CMBS Issuance ($B)

CMBS private label issuance continues to surge, reaching $75 billion and on pace to potentially double 2023 issuance ($46 billion) and eclipse 2022 issuance ($99B).

Delinquency Rates (%)

The overall delinquency rate continued to climb in September, rising 0.26% to 5.70%. While most sectors within CMBS increased during the month, the retail industry was the most impactful, contributing roughly 50% of the net change in total delinquency levels. In retail, many large retail loans turned delinquent in September, pushing levels higher.

Commercial Real Estate Quick Hits

Rate cuts are here

Cuts are positive for commercial real estate, but longer Treasury yields will limit the relief. Issuance patterns remain solid, with 5-year tenors dominating.

Hurricane Helene

There is approximately $11B CMBS exposure across 400 deals with 746 properties

• Short-term impact: Hotel and self-storage demand increases, spike in special servicing and delinquencies
• Payout timing impacted: Properties may file for business interruption claims
• Insurance premiums: Insurance will remain available, increases will be moderate

CRE transactions rebound

Transactions increased 3% in Q2 2024, compared to a 59% decline in Q2 2023. Significant capital reserves are waiting for more substantial discounts before deploying capital, resulting in a gap between what buyers are willing to pay and what sellers are willing to accept.

Residential Mortgage-backed Securities

• • Non-Agency RMBS issuance remains strong, up 98% vs last year; down 25% relative to 2022.
• • Lower rates should boost existing home sales and refinancing activity for those who recently acquired a mortgage.
• • Fannie Mae’s Refinance Application-Level Index (RALI) dollar volume is up 248%, and the RALI count is up 150% compared to the same week last year (ended September 27).
• • Mortgage rates hit a 20-month low on the heels of the Fed’s initial rate cut (6.69% Bankrate US 30Y Fixed Mortgage Rate, 6.08% Freddie Mac 30Y Fixed Mortgage Rate).

 

RMBS Issuance ($B)

Key
CAS/STACR — Connecticut Avenue Securities bonds/Structured Agency Credit Risk bonds
Non-QM — Non-qualified mortgages
RPL/NPL — Re-Performing Loans / Non-Performing Loans
SFR — Single-family rentals