The commercial mortgage-backed securities market could be headed for a period of “February-like hibernation,” at least in the short-term, until the dust settles from the surprise Brexit vote last week, according to industry research firm Trepp.
The CMBS market has already experienced a lackluster performance so far this year, pushing just $27 billion in issuance so far, primarily due to volatility and widened spreads earlier in the year. Now, spreads on CMBS and CMBX, the market’s index, have widened significantly following the Brexit news.
“Our guess is that in the short-term, we go back into a February-like hibernation for new issuance,” Trepp analysts wrote. “Until the markets settle, spreads stabilize, and we get a sense of what everything means for the rest of the Eurozone, we would expect new issuance to slow once again and for desks to be careful in their lending quotes.”
Upon initial news of the UK’s decision to leave the European Union, CMBX 6/7/8/9 AAA spreads on Friday widened five to six basis points; CMBX 6/7/8/9 AA spreads 17 to 19 bps; CMBX 6/7/8/9 A spreads 18 to 22 bps; and CMBX 6/7/8/9 BBB- out 30 to 40 bps, Trepp noted in a newsletter.
By Monday, CMBX 6/7/8/9 AAA spreads had widened an additional four to five basis points; CMBX 6/7/8/9 AA another five to six; CMBX 6/7/8/9 A by an added 12 bps; and CMBX 6/7/8/9 BBB- spreads were wider by almost 25 bps.
Trepp did note that over the “medium-term,” beginning in September, lower Treasury rates could be a “modest net positive” for CMBS lenders in terms of market share. The yield on 10-year US Treasuries dropped an additional 11 bps to 1.46 percent on Monday.
“With insurance companies not loving the low absolute yields, CMBS rates could look attractive to some until risk retention kicks in later this year,” Trepp analysts wrote.
Meanwhile, US equities fell sharply again on Monday, with the Dow losing 261 points (1.50 percent) and the S&P 500 and Nasdaq dropping 1.81 percent and 2.41 percent, respectively.
Despite the volatility in the US markets and a rocky few months likely ahead, the overall economy is expected to power through. In the CRE markets, there could also be some flight to quality for US real estate assets as Brexit has more profound impacts in Europe and globally.