CMBS runs out of steam as volatility cools the engine

Total US 2015 volume likely to fall $25bn short of widely tipped $125bn, writes Al Barbarino

Strong US CMBS issuance in the first half of 2015 was in line with inflated early predictions for a post-recession breakthrough year, but the year-end figures are likely to disappoint. Total issuance to late November this year hovered around $85bn, according to research firm Trepp, far lower than many early predictions from companies and individuals.

After a $93.1bn year in 2014, January’s CRE Finance Council 2015 Market Outlook Survey found 70% of respondents tipped 2015 issuance to be $100bn-$125bn and 18% believed it would be above $125bn. In December 2014 Morgan Stanley predicted 2015 issuance of $125bn, or up to $140bn in a “bull case” and $100bn in a “bear case”.

“The CMBS market is moving full speed ahead as commercial real estate prices return to pre-crisis peaks, issuance accelerates and underwriting standards loosen,” Morgan Stanley reported at the time.

However, the bear case seems to have prevailed. “The year is heading to the finish line in a modest way,” says Mitchell Kiffe, CBRE Capital Markets’ senior MD of debt and structured finance, noting that issuance is likely to end the year around $100bn – a “disappointment” for many.

“A lot of that is due to market volatility, with credit spreads widening dramatically,” Kiffe says, noting that interest rate hikes also look likely. “Investors are in no hurry to buy 10-year fixed-rate bonds as interest rates rise if returns go higher in the next few months.”

Three of the year’s top five deals were issued during Q1, including the $1.8bn GAHR Commercial Mortgage Trust, 2015- NRK (Northstar skilled nursing) deal and $1.8bn Motel 6 Trust, 2015-MTL6.

Top five Largest US CMBS Deals 2015

Market loses momentum

The momentum lasted roughly to the half-year mark, when issuance stood at $49.5bn, compared with about $37bn at the halfway point last year. The market then slowed considerably, with similar issuance to last year in July and August and just $5.4bn in September, down from $15bn last year.

“Appetite for larger deals fell as the market got choppier; as a result, deal size has shrunk,” says Mike Schulte, head of pricing and distribution at Silverpeak Real Estate Finance. “Deals smaller than $1bn are just easier for people to digest. Selling $400m-plus of last cash flow triple-As is much more difficult today than it was nine months ago.”

Where the CMBS market has stumbled, banks, life insurers and especially agency lenders have picked up the slack. Banks or life companies have been striking deals involving larger assets, says Mike Riccio, a senior managing director and co-head of national production (with Kiffe) at CBRE.

Meanwhile, the government-sponsored enterprises, combined with the Federal Housing Authority (FHA), were expected to originate $102bn in loans by the end of 2015, compared with $73bn in 2014, the Mortgage Bankers Association estimates.

Experts expect about $90bn to come from Fannie and Freddie, partly due to May revisions from the Federal Housing Finance Agency to affordable housing income threshold criteria and the exclusion of some housing from $30bn annual origination caps set earlier in the year.

However, despite volatility in the CMBS, market, “People can still make money and do right by their borrower,” Schulte says. “People are optimistic that spreads could come in and stabilise further.”

CMBS issuance peaked in 2007 at about $230bn, but ground to a standstill during the recession. The market is unlikely to see such figures anytime soon, if ever, but it will be important for CMBS to bounce back, as hundreds of billions of dollars of CMBS maturities are due in the coming years.

“We need CMBS to be healthy to take care of the volume expected to come through next year and the year after,” Riccio concludes.