Despite some blunt assessments on the outlook for CMBS, room for optimism remains as spreads chart impressive reversal.
As I walked the floor at CREFC’s High Yield & Distressed Realty Assets Summit in Manhattan back in March, I recall distinctly how one industry acquaintance bluntly summarized the mood of the event: “This is depressing, isn’t it?” he asked.
I sat down to write a column focused on CMBS this week because I thought I might riff on how much things had changed since then. After all, several recent positive developments had led me to believe that CMBS could stage a comeback after a dull start to the year.
Earlier this year ‘AAA’ tranches were pricing at 170-plus basis points over swaps, but the latest deal to price, JPMDB 2016-C2, cleared at S+117 this week, well inside the S+125 for the MSBAM 2016-C29 deal that was 2016’s previous best, Trepp noted today. There’s also a bill seeking to mitigate the impacts of upcoming risk retention rules, and according to Trepp data issuance levels of $19.4 billion through April are on par with 2014’s $19.8 billion, which was a $93.1 billion year.
In late February Kroll Bond Rating Agency (KBRA) lowered its 2016 issuance projection to $60 billion. Surely KBRA would be revising their $60 billion estimate, I thought. But Paul Fitzsimmons, head of CMBS Research at KBRA, was sticking to his guns this week.
“Everyone has pushed their projections down,” he said. “I just hope we hit the $60 billion.”
Risk retention rules, which go into effect in late December, will force CMBS issuers to retain a 5 percent slice of every new deal they issue — or designate a B-piece buyer to take on that risk. A greater number of loan applications in April and May could lead to increased CMBS issuance over the summer months, but the new rules otherwise give issuers — leery of the rule’s broader implications — very little time to close deals by year end, Fitzsimmons said.
“If the last deals of the year are priced in early December, loans are closed around October and November, which means they were probably bid on around August or early September resulting in reduced activity at that point,” he said.
The Preserving Access to CRE Capital Act of 2016 aims to lessen the burdens of risk retention by excluding loans deemed “low risk” or “Qualified Commercial Real Estate” (QCRE), mainly single asset-single borrower deals. The House Financial Services Committee voted in favor of the bill and Martin Schuh, CRE Finance Council’s VP of legislative and regulatory policy, said his organization is now “actively seeking Senate support for the measure.” However, any passage of that bill could be at least several months off, especially during an election year, making any tangible impacts this year unlikely.
Finally, while widened spreads have indeed reversed course, it can be argued that it’s a lack of supply that is largely responsible for helping push spreads lower, as Trepp suggested in a memo earlier this week.
Meanwhile, in the trenches, the head of one CMBS origination shop told me this week that “CMBS is definitely still the last bus stop for most borrowers” and that tighter spreads weren’t changing that. He is “sitting tight” and waiting for the right deals, but business has otherwise fallen short of original projections.
Yet I found some additional optimism from Trepp analyst Sean Barrie, who told me the recent spreads reversal “will go a long way to restoring the market’s faith that the sector can perform well [and] give confidence to lenders who currently feel they wouldn’t have their loans accurately priced if they went to market.”
The tightening spreads coupled with the passage of a bill mitigating risk retention impacts could all bode well for CMBS down the line and will indeed restore confidence in the market, even if it doesn’t significantly impact issuance this year. So, in keeping with that optimistic spirit, I’ll go ahead and put Real Estate Capital’s own CMBS issuance projection — of $60.1 billion — on the record.