CMBS: Some Bumps Ahead

The rest of 2016 will likely be as “bumpy” as the first half was for commercial mortgage-backed securities, said Brian Olasov, Executive Director with Carlton Fields, New York.

Trepp, New York, said early 2016 “fell squarely into the ugly category” as investors grew anxious about prospects for China’s continued economic growth, falling oil prices and the first Fed rate hike, which pushed fixed-income spreads wider.

“CMBS conduit shops all but shut down in January in the face of widening bond spreads,” Trepp’s The Good, the Bad and the Ugly CMBS research report said. Spreads on last cash-flow AAA bonds, which started the year at 162 basis points more than swaps, grew to the 170 basis point in early March before the market stabilized, the report said.

“The slowdown put a dent in the initial high expectations for 2016 CMBS issuance,” Trepp said. New CMBS issuance fell nearly 40 percent below last year’s pace as of late May.

Meanwhile, prices of loans underlying the CMBS universe declined in May, loan marketplace DebtX reported. During the month the estimated price of whole loans securing CMBS decreased to 98.6 percent from 100 percent in April, DebtX Managing Director Will Mercer said.

“CMBS prices fell in May, and we saw a slight decrease in the proportion of performing loans to non-performing loans,” Mercer said. “The price decline can be attributed to an increase in the Treasury yield curve and the minor change in portfolio composition.”

Olasov noted that CMBS loans are now being closed again as opposed to the beginning of the year, “but volumes are in jeopardy based on questions over risk retention,” he said. Starting in December, CMBS issuers must retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk.

“Not all is gloom,” Olasov said. “Real estate loves leverage when net operating income is growing as it is now and loves leverage when absolute borrowing costs are low and stay low. And the dreaded ‘Wall of Maturities’ may turn out to be the ‘White Picket Fence of Maturities’ as more than half of 2006 deals have already paid off and overall lending against commercial real estate sets records across certain sectors.”