Borrowing Costs For CMBS Loans Jump To 7%, Doubling Pandemic Lows
Wall Street has restarted its commercial real estate lending last month, but with an average coupon rate of more than 7%, borrowers are paying the highest costs in the past decade.
Wall Street financing, known as commercial mortgage-backed securities or CMBS loans, ground to a halt in early May before restarting later in the month. Goldman Sachs analysts found average financing for hotels, shopping centers and other commercial properties had doubled from a pandemic low of 3.5%, MarketWatch reported.
The weighted average coupon on conduit loans since 2011 has hovered between 4% and 6%, not surpassing 6% until late 2022, according to MarketWatch data.
CMBS loans are not as common a lending source for commercial property owners as banks or insurance companies. But it is the cheapest source of financing available, partially because loans are bundled and sold to investors that share the risk of borrower defaults, per MarketWatch.
Wall Street packaged $5B worth of new property loans into bond deals in May, compared to about $8B for the first four months of the year, Goldman Sachs researchers found. Lending is on track to be much lower than the $70.2B of CMBS loans issued in 2022, which was already a 36.5% drop from 2021 and lowest level since 2018.
CMBS coming back is “really important,” KSL Capital Partners co-founder and CEO Eric Resnick said at the NYU International Hospitality Industry Investment Conference this month, as reported by CoStar. Resnick added that having diverse lending options is also necessary.
"[CMBS] works for performing assets, but it doesn't work for heavy [capital expenditures] and it doesn't work for transitional assets,” Resnick said. “So we can come up with a solution there and others can, too. It's not just about us. It's about coming up with a hybrid structure, right now."
The delinquency rate on existing CMBS loans in May spiked by the most in three years, Bisnow previously reported. A Trepp report showed that the rate of loans behind on payments rose 53 basis points, the largest month-over-month increase since June 2020.
Analysts said investors and market participants anticipated the spike.
“Since last summer, higher rates and lagging office demand have led to expectations of substantially higher delinquency levels," Trepp Senior Managing Director Manus Clancy wrote in the report. "It appears that the tipping point came this month."
The terms of credit “remain squarely in the favor of lenders,” Goldman’s credit team wrote in a weekly client note.