CMBS now accounts for a paltry 7% of the overall CRE lending market, down from 17% in 2015. And as regulations are increasing, that trend will persist. Besides, figuring out how to adhere to these rules has made structuring deals difficult for banks, and PIMCO warns commercial real estate prices could fall a full 5% in the next 12 months.
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CMBS activity is at one-seventh of its high-water mark of 50% in 2006.The price of securitized debt fell precipitously in February when oil-induced panic prompted hedge funds to sell significant portions of the subordinate CMBS debt they held.
CMBS market volatility can be caused by regulation like Risk Retention, which compels lenders to hold a 5% stake for at least five years. The rationale is that forcing lenders to “keep skin in the game” will reduce moral hazard and vest interest.
The most prominent lending institutions struggle to adapt to this new environment, and plan to keep a representative vertical cross-section of the package, from triple-A to unrated.Further complicating matters is the lack of clear penalties for violating these new rules.
Amidst this, issuance is down 50% YTD, CMBS loan values have plummeted over 30% since their peak in ’07, and today more CMBS loans are paid off than originated. This is dangerous, because according to Walker & Dunlop Commercial Property Funding CEO Robert Restrick, CMBS are essential, and must continue to exist as a source of financing.
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Demanding better credit quality and underwriting practices can restore faith in the CMBS reputation, which was damaged by the recession. One benefit of CMBS is that it is more sensitive to the US economy, and thus attractive for investors looking to insulate themselves against volatility concerns and uncertainty introduced by Brexit or Chinese currency devaluation.
There has been a resurgence of indicators of positive momentum in the CMBS market. Chicago-based Walker & Dunlop managing director Jeff Robbins (pictured above) is seeing more diversified capital flowing into the debt market. Life company and pension fund advisory capital are delivering sub-3% long-term fixed rates.
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He says the CMBS market appears to be regaining its footing, while the stronger GSEs continue to provide attractive terms on multifamily assets across the country—affordable properties are getting better terms in today’s market than ever before.“CMBS maturities continue to look for a home, but as reported by Morningstar recently, only 65% of May maturities paid off in full. There was a total of $5B of maturing CMBS debt in May 2016,” Jeff tells us.
Milwaukee-based Walker & Dunlop managing director Matt Ewig (pictured above with family) confirmed and expanded on Jeff’s remarks. He too sees more cheap capital flowing into the market than ever and life companies doing 10-year loans at fixed rates under 3% and for high-quality assets.
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He tells us these attractive rates create a strong appetite for longer loan terms of 20 to 35 years. "Locking in at record low rates is the best hedge against future disruptions to the economy and capital markets that could constrict capital and make borrowing more expensive.”
To learn more about the experts who provided the above market analysis, click here.
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