— By Sunny Sajnani
The Commercial Mortgage-Backed Securities (CMBS) market has experienced a series of ups and downs, creating a very uncertain start to 2016. According to Commercial Mortgage Alert, U.S. CMBS issuance has totaled up to $19.0B thru Q1 2016, which is a 30% decrease from issuance volume reported for the same period in 2015. We are seeing signs that Q2 could be a different story.
Most originators in the securitized space thought 2016 and 2017 would bring significant profitable trades. It seems that the need for new issuances in the CMBS market have been threatened by macro-economic factors, such as:
- Low oil prices
- Increasingly strict regulatory rules and high costs
- Banks cutting ties with CMBS to reduce risk
- Possibility of a second interest rate hike
“The outlook becomes slightly dubious for the more-than-$200 billion in non-defeased, non-deliquent loans coming due between now and the end of 2017,” notes Trepp, LLC. It seems that uncertainties about the overall economy are hitting CMBS harder than some may have thought.
As global markets reacted to the Chinese slowdown early this year, spreads on CMBS widened as investors looked for a higher risk premium. Compared to the middle of 2015, spreads moved up in Q1 2016 almost 100 basis points on AAA-rated tranches and even 200 to 300 basis points on BBB-minus rated tranches. This has slowed down new issuance as it becomes more difficult for CMBS lenders to set interest rates on their loans.
Going into Q2 2016, the CMBS market seems to be on rebound with spreading compressing substantially. AAA-class has tightened from the wide in February of 10yr Swaps plus 1.73% to the recent print of 10yr Swaps plus 1.25%. BBB-class has tightened from the wide in February of 10yr Swaps plus 8.25% to the recent print of 10yr Swaps plus 6.60%.
What does this mean to the bottom line? As a result, where loans were closing above 5% in February for 75% LTV loans, the same loan is now closing sub 4.70% and for 65% LTV the loan is 4.50% all in.
Although CMBS feels like it may be rebounding, the B-piece buyers are definitely keeping a close eye on underwriting. B-piece buyers act as the adults in this business, and tend to keep things a bit more conservative and realistic for the entire industry. Standards have, by no means, slipped to the levels of a decade ago, when underwriters would factor in future rents rather than in-place cash flow, but today’s underwriting is definitely more lax than at the beginning of the current recovery. Volume will continue to stay “in bounds” as long as the B-piece buyers stay conservative as they have been the past quarter.
MCA is constantly monitoring CMBS market conditions to maximize our clients’ financing in turbulent times like those we are experiencing now. In order to get the best execution possible, please contact a Senior Director at MCA to discuss underwriting and placing a CMBS loan.