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CMBS Issuances Double In June To $12.3B As Fear Of Risk-Retention Rules Dissipate

Commercial lenders issued the most commercial mortgage-backed securities of the year in June, signaling a return of confidence in the market after new risk-retention rules took effect in December.

Last month, banks and lenders issued 451 CMBS loans worth $12.3B in debt — twice the value of CMBS loans issued in any other month this year and three times the 135 loans secured in May

CMBS Issuances Double In June To $12.3B As Fear Of Risk-Retention Rules Dissipate
The General Motors building at 767 Fifth Ave. in Manhattan

“This is the second-highest monthly total in the past 18 months,” Trepp analyst Sean Barrie said. “There’s activity now as more people have opened up to risk-retention [rules].” 

In 2016 the industry was in an uproar as strict lending regulations forced lenders to keep more money on the books when underwriting loans. Fear that this tightening would deter banks from issuing loans was rampant in 2016, but that uncertainty has lessened and the CMBS market has settled into the new standards, Barrie said. Issuances in the first half of 2017 are up nearly 22% to $32.3B, compared to $25.9Bin the first half of 2016.

Properties in New York, Los Angeles and Washington, D.C., overwhelmingly dominated the loans issued in June, with office, mixed-use and lodging assets receiving the largest allocation.

Among the largest loans issued for the month is a $1.5B loan for New York’s General Motors building at 767 Fifth Ave., one of the most valuable buildings in the world. The CMBS loan, which closed June 30, is part of an effort led by majority owner Boston Properties to refinance the building for $2.3B with a handful of lenders. The 10-year, fixed-rate loan replaces a $1.6B loan package that expires in October. 

In the Los Angeles market, one of the largest loans issued in the month was for the Del Amo Fashion Center in Torrance. The 2.35M SF shopping strip, owned by a JV between Simon Property Group and Farallon Capital Management, received a single-property CMBS loan from Banc of America Merrill Lynch for $62.6M that closed June 20. 

“Issuance was slow out of the gate but has picked up nicely over the last few months,” Trepp Research Associate Joe McBride said. “The wall of maturities has caused some upticks in delinquencies and extensions, but it’s been handled well by the market so far.”

Alternative Lenders Fill The Gap

Offices, office market, office building

New CMBS risk retention regulations under the Dodd-Frank Act require lenders keep 5% of the value of a loan on their balance sheets rather than selling it entirely in the form of bonds — essentially making CMBS less profitable to issue. Banks are thus taking on smaller loan-to-value. The goal is to prevent another financial crisis. 

This has forced developers to turn to non-bank alternative lenders for mezzanine debt, preferred equity and joint venture equity to secure enough capital to get a project off the ground. 

A decade ago alternative lenders, or debt funds as they are more popularly called, were known as the last option for borrowers looking for capital. Today, these funds are standing toe-to-toe with some of the country's largest banks.

The new administration has been persistent in its calls for financial deregulation and the rolling back of rules enacted by the Obama-era Dodd-Frank Act, but little headway had been made on that front. House Republicans approved a bill in early June to rework the law in a 233-186 vote, but the bill is not likely to pass the Senate as smoothly.

The bill, named the Financial Choice Act, would erase and rework rules in Dodd-Frank, exempting some financial institutions that meet capital and liquidity requirements from certain Dodd-Frank rules. The proposal aims to cut through the bureaucratic red tape that the new bill's supporters claim is stifling the growth of small businesses and limiting risk-taking.