Nearly all respondents (98 percent) to the CRE Finance Council’s annual Market Outlook survey expect CMBS spread volatility to continue in 2016, reflecting a range of geopolitical and other concerns.
71 percent of respondents said CMBS spread volatility will be “somewhat” volatile, while 27 percent expect volatility to be “high.”
“Respondents expect geopolitical events and domestic politics, deteriorating credit standards, and contagion from other asset classes as most likely to influence spread volatility in 2016,” CREFC wrote in the survey.
US CMBS issuance ended 2015 just over $101 billion, a post-recession first, but a tally that is significantly lower than early predictions for 2015. Widening spreads and continued turmoil across the world were partially to blame, as they will be in 2016, according to the survey, with respondents expecting only slight increases in issuance.
“Commercial mortgage-backed securities (CMBS) issuance expected to marginally exceed 2015 volume of approximately $100 billion, with 2006-2007 vintage maturities fueling much of the demand,” CREFC stated.
About 65 percent of survey respondents expected new CMBS issuance in 2016 to be in the $100-$125 billion; 17 percent believe the number will be in the $75-100 billion range.
CMBS spreads became especially concerning beginning in August, when spreads widened to record highs; 10-year AAAs began pricing in the 100-107 bps range after spending much of the beginning of the year near 80 basis points over swaps and at least two new conduits priced at levels not seen since 2013.
Despite this, survey respondents generally believed commercial real estate markets are fundamentally sound, expecting construction activity to be at or above the average historical rate of 1.9% of the existing building stock in 2016, and most balance sheet and private capital lenders expect to increase loan origination volume.
In addition, 76% of survey respondents expect private capital (non-bank) sources to originate more loans in 2016 than 2015; and the majority of survey respondents expect foreign investment in both CRE debt and equity to increase.