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CMBS Issuance Soars 55% In Q1, With JPMorgan And Deutsche Bank Taking The Lead

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Commercial real estate lending activity was robust in the first quarter, with CMBS issuance up 55% from a year ago to $19.4B, according to recent Trepp data

Experts attribute the leap to two key factors — lenders' growing comfort with new risk retention rules and the rising-interest-rate environment. 

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“It is a very big leap and it is very positive for the market,” Trepp Senior Managing Director of Applied Data, Research and Pricing Manus Clancy said. “But part of the reason it was so big was that Q1 2017 was very light.”

Looming risk retention rules that took effect in December 2016 caused lenders to tread lightly in the first half of 2017 to see how the new regulations would impact the market. The amended rules require lenders to keep 5% of the value of any loan on their balance sheets, rather than selling it entirely in the form of bonds. In some cases, these rules have made CMBS loans less profitable to issue and have required commercial real estate sponsors to put up more capital to see a deal through. That hasn't stymied deals, though. 

“People were stuffing as much as they could into late 2016 because they didn't know how risk retention would play out and how the market would receive new deals. As it turns out they were well-received [and] it took the market about six weeks to get out of first gear in 2017,” Clancy said. “This year there was no change to the law or the regulations [so] the market was well-positioned to start the new year right away, and that was reflected by a very strong first quarter.”

Rising interest rates led borrowers to redouble their efforts to secure financing while the 10-year Treasury rate was still relatively low last quarter. The 10-year rate jumped to 3% earlier this week before settling to 2.97% on Wednesday. Though this is still below the long-term average of 6.22%, Clancy said many borrowers were trying to lock in deals before the rate hit 3%.

The Federal Reserve raised short-term interest rates in March for the first time this year to a range of 1.5% to 1.75%. Fed officials also boosted their economic forecasts and expect to raise rates another one or two times this year. 

“It’s still low but it’s not as low as a year ago when the 10-year was 2.25%,” Clancy said. “People would be kicking themselves if the rate went to 4%.”

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Of the $19.4B in debt issued last quarter, JPMorgan Chase was the largest contributor, issuing 54 loans totaling $3.1B. Deutsche Bank came in second with $2.6B in debt in Q1; Goldman Sachs, Citigroup and Barclays trailed behind, accounting for $2.1B, $1.9B and $1.4B, respectively, according to Trepp. Research reveals the five most active lenders accounted for roughly 58% of securitized debt during the quarter. 

“We’ve seen the market continue to perform very well,” Clancy said. “Obviously in 2018 we’ve seen a lot of volatility with the Dow being up and down 600 points, [but] that has not resulted in any tapping of the brakes in the CMBS market.”

Clancy does expect lending activity in the CMBS market to taper off some in Q2 since fewer loans will be in need of refinancing. The massive wall of CMBS loans issued in 2006 and 2007 came due in 2016 and 2017, but Clancy said lending hit a brick wall in 2008 amid the financial crisis.

“In 2008 all lending dried up because of the crash … [and] in 2018 there are very little loans coming due because so few loans were issued in 2008. That is why it’s very possible we’ll see lower volume than we saw in [Q1]…” he said. “In the face of volatility, any reason we see [a] dip in 2018 will be because of technical reasons, not because the market is getting skittish.”