Single-tenant exposure within commercial mortgage-backed security (CMBS) conduit transactions has been on the rise in recent years. The number of loans backed by a single tenant has increased substantially, rising to just over 18% on average thus far in 2019. This represents an increase of 109% since 2013. Properties containing just one tenant may have a higher probability of loss than a property with multiple tenants. Office properties often compose the greatest concentration of single-tenant exposure; however, retail and industrial properties can also have elevated single-tenant risk.
While underwriting standards have largely remained disciplined in recent years, the steady rise in single-tenant concentration, as depicted in this week’s chart, should give investors pause. Single-tenant buildings expose bondholders to the risks associated with reliance on a single tenant’s ability to meet its debt service requirements. Should a tenant face financial difficulty or choose to let their lease expire, re-tenanting could prove challenging given the type of space and market location.
Various factors such as lease terms, expiration of the loan term, submarket location and demographics, creditworthiness of the tenant, dark value and use of space should be evaluated when analyzing these loans. In some cases, single-tenant properties are “built-to-suit,” or designed specifically to fit the tenant’s particular needs. In addition, maturity risk can be elevated, as it is not unusual to have leases that are co-terminus with the loan’s maturity date. Therefore, the potential exists for the tenant to renew their lease, consequently hindering the borrower’s ability to refinance.
While these loans may raise initial concerns for investors, single-tenant properties are often high-quality, creditworthy tenants, which can alleviate risks. A high-quality tenant with a long-term lease mitigates lease renewal and business risks. Favorable lease provisions can also ease risks related to expenses involved in re-leasing a property. Investors should look for transactions that limit the use of single-tenant loans, or have high-quality tenants located in primary markets. Diversification across the transaction in terms of property type and location can allay potential revenue loss from departures or uncertainty with single-tenant loans.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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