CMBS Market Musings: An Interview with 3650 Capital’s Malay Bansal

Malay Bansal is 3650 Capital’s Head of Trading & Capital Markets. He brings over 30 years of broad markets experience in commercial real estate, capital markets and fixed-income investments. Roles he has held include head of trading, head of securitization & banking, head of CRE warehouse financing, head of structuring and head of portfolio management and advisory.

MBA Newslink recently interviewed Malay Bansal, Head of Trading & Capital Markets at 3650 Capital, who shared insights about the CMBS issuer ecosystem and CRE securitization markets.

MBA Newslink: Discuss the increase of multifamily collateral present in CMBS products this year. Do you expect this to continue?

Malay Bansal: So far this year, multifamily loans comprise about 20% of collateral in non-agency CMBS deals. In recent years prior to 2024, the multifamily share was generally in the 5% to 12% range.

Before 2008 and the Great Financial Crisis, multifamily hovered around 15-20% of CMBS deals. After the GFC, the agencies increased their origination volumes significantly. Given the lower funding cost for agencies, CMBS was less competitive and lost market share. Origination volumes for the agencies are affected by the parameters set by the FHFA, their regulator. With the recent FHFA guidance, agency origination of multifamily loans has been down, and that is driving more multifamily loans to non-agency CMBS.

The second factor that was affecting volume of multifamily loans in CMBS, especially in 2021 & 2022, was borrowers taking transitional loans from CRE CLO lenders instead of fixed-rate conduit lenders, even for properties that were close to stabilized. The attraction was the low coupon of floating-rate transitional loans given that the short-term rates were close to zero. Lower coupons provided better economics with low multifamily cap rates of around 4%. Also, these loans allow prepayment flexibility.

CRE CLO issuance increased to $45.4 billion and $30.3 billion in 2021 and 2022 respectively, with the vast majority of collateral being multifamily, from about $10 billion/year average over the previous five years. However, as the Fed increased rates rapidly, the floating-rate coupons became higher than fixed rate, and cap costs went up dramatically. 2023 and 2024 CRE CLO volumes came down to about $7 billion. The multifamily loans that were going to CRE CLOs are now coming to CMBS.

The third competition for multifamily loans came from smaller and regional banks, who were often doing loans at lower coupons than required by capital markets execution of CMBS. With regulators focusing on these banks’ high concentrations of CRE loans, the banks have become less aggressive, making CMBS more competitive against them. Even with an incoming new administration intending to reduce regulations, the Basel III endgame is still likely to be a factor in the coming years, and banks will need to ensure they have sufficient capital to adhere to potential regulatory changes.

Favorable movement on the above three factors is helping CMBS gain market share in multifamily. There are other factors that will also be supportive. A lot of 2021 and 2022 CRE CLO multifamily loans are now maturing. These loans need to be refinanced (by the current owner, or a new one if the property is sold), and CMBS is most likely going to be the lender on these.

Another factor is going to be the increased origination volume for multifamily loans. The MBA is forecasting multifamily originations of $297 billion in 2024, $390 billion in 2025 and $424 billion in 2026 (compared to $246 billion in 2023). With other lenders pulling back, CMBS stands to benefit from the increased volume of loans.

MBA Newslink: How have conduit securitizations evolved over the last few years and what do you expect in this regard going forward?

Malay Bansal: Conduit securitizations have been evolving over time as a result of the industry’s efforts to improve the product, and from regulatory and market developments.

After the Great Financial Crisis of 2008, the industry made several changes to the securitization structure resulting in CMBS 2.0 and CMBS 3.0. Now there are conversations on a CMBS 4.0, though they are in early stages.

Another change was the introduction of risk retention rules with the intention of making the originators retain some skin in the loans they securitize. The risk retention can be horizontal, vertical or a combination of both. Horizontal risk retention requires retaining a subordinate position in the loan pool, whereas vertical requires a pro-rata retention. The former is impacted a lot more by any losses in the pool. For the last several years, vertical risk retention was more commonly used, but in 2024 the trend has been much more skewed toward horizontal retention (the share of vertical dropped from 45.8% in 1-3Q23 to 8.9% in 1-3Q24), even though there are fewer risk retention buyers who have capital for horizontal risk retention. Horizontal risk retention positions are impacted more by losses, and so b-piece buyers are more conservative in approving loans. That, and the simple supply-demand dynamics that are outlined above have resulted in better pools for investors. 

Another development is the advent of five-year conduit transactions and five-year fixed-rate SASBs. With rates high, borrowers did not want to lock in high rates for the long term. So, they preferred five-year loans instead of 10-year loans. At the same time, investors did not want to buy longer bonds since they lose more value as rates go up. This confluence has resulted in the majority of conduit deals being five-year at present. Five-year transactions are a new phenomenon for the US CMBS industry (I started a five-year conduit program in Canada several years ago). The 10-year loan demand is and will be returning, but I believe five-year deals are here to stay.

The collateral composition of deals has also been changing and adjusting to investor preferences. For a while, hotels were out of favor, then retail assets (especially malls) were out of favor. Currently, office is a less desirable property type, and only lower-leverage, high-quality offices are found acceptable.

MBA Newslink: Describe 3650 Capital’s strategy and focus within CRE finance landscape.

Malay Bansal: 3650 Capital, formerly 3650 REIT, is a nationwide alternative commercial real estate lender, special servicer and solutions provider focused on originating, servicing and asset-managing loans and providing advisory support to global institutions. 3650 is a full-service lender that is able to provide financing across the entire capital stack, including fixed and floating rate financing and loans on stabilized properties, light transitional loans, transitional/value-add loans, and rescue/special situation capital.

3650 is dedicated to long-term, value-added relationships. We stand by our borrowers and partners for the life of their projects and business plans from origination to execution through asset management and exit. We maintain strategic control over loans we make for the entire lifecycle. The 3650 platform seeks to consistently result in improved outcomes for the borrowers. 

Every loan and sponsor relationship is supported by our in-house servicing and asset management team, which is focused on responsive communication and enhanced decision-making. We take pride in being available to our borrowers at any time during the life of the loan.

MBA Newslink: What are some opportunities in the current market environment from your perspective as lender and investor?

Malay Bansal: As a lender, 3650 and other CMBS lenders have an opportunity to gain market share as banks pull back from CRE lending given their high concentration in the sector. Among CMBS lenders, those (like 3650) who can provide borrowers with a superior experience will attract more deal flow. Also, lenders who have the ability to fulfill risk retention requirements themselves will have an advantage over those who do not.

For investment-grade investors, consider how things have changed completely in recent times. Full-service hotels were formerly preferred over limited-service hotels. That has changed. Malls were considered safer than strip centers. That has changed. CBD Offices were previously solid and preferred over suburban offices, but not anymore. SASBs were considered to be super safe. Now, some SASB transactions with less favorable characteristics are taking losses even at the very senior investment grade level. So, it’s clear that things change. For investors, especially those investing in senior bond classes, deals backed by a pool of loans that are well diversified in terms of property type, geography and sponsor are probably the best bets.

For property investors, cap rates have likely peaked for the time being at this point (unless a resurgence in inflation pushes long-term rates up significantly). So, value increase is going to be more about the cash flow growth. If inflation has also peaked, costs will stop going up, and that will help. Multifamily has seen some headwinds in some hot markets where there was oversupply, but that will get worked out in next year or two. People have to live somewhere, and there is a shortage of housing. Therefore, multifamily rents can go up more.

Office space, on the other hand, is not absolutely necessary, and a lot of pre-covid leases in CBD offices have not rolled yet. Our expectation is that it will be another three to five years before there is clarity on offices. Industrial should continue to see demand with increased focus on on-shoring production. Hospitality and retail are likely not going to be big movers in this environment, though hotel performance will be more sensitive to the performance of the broader economy. Picking the right markets and the right assets within those markets will continue to be important for all property types.

For property owners and borrowers, the current focus has been five-year loans. In the future, with inflation around 2-3% and the increasing deficit, rates are likely going to be higher, and the curve is likely to steepen. That will make five-year loans relatively more attractive than 10-years. So, for borrowers who are long-term holders of the properties, the current flattish curve provides an opportunity for those who want a longer-term loan.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)