CMBS Lenders Cast a Wider Net

Commercial mortgage-backed securities lenders are shifting their attention–and their capital–to some alternative U.S. markets, reported Trepp, New York.

“As property investors increasingly focus on fast-growing ‘18-hour’ cities, both major and secondary markets are experiencing accelerated growth rates,” said Trepp Senior Managing Director Manus Clancy. “As a result, CMBS deals feature a growing volume of loans against properties in those markets.”

Trepp’s Top 20 CMBS Markets for Growth and Investment report said major and secondary markets are seeing higher CMBS issuance growth than the six largest “top-tier” metros. These markets–New York, Los Angeles, Chicago, Washington, D.C., San Francisco and Boston–still show consistent absolute economic growth. But property prices in those “24-hour” cities are approaching new peaks and their higher costs of living and conducting business are driving investors toward smaller markets, including up-and-coming secondary areas.

Trepp measured nine factors including employment growth, net operating income growth, weighted-average debt-service coverage ratios and year-over-year CMBS issuance growth to track a city’s absolute growth and relative growth. Seattle, Las Vegas, Atlanta and Orlando topped the rankings for CMBS investment opportunities. “These markets feature robust population growth, employment growth and solid CMBS loan performance,” Trepp said. “Seattle, Las Vegas and Orlando are each in states that don’t have an income tax, and Georgia has a reputable low tax burden and business-friendly climate.”

Metros such as Phoenix, Dallas, Tampa, Fla., Charlotte, N.C. and Denver ranked slightly lower. “These markets experienced varying CMBS loan performance; some outperformed while others struggled with rising delinquencies, below-average DSCR or sluggish NOI growth,” the report said. “Still, these middle-ranking markets could still provide interesting opportunities for CMBS lenders, as some of the lackluster CMBS growth rates may be attributed to loans with lower credit quality in the wall of maturities.”

The Millennial demographic is a large driving factor for investor interest in Trepp’s “18-hour cities,” which offer affordability as well as a vibrant live-work-play culture where entertainment and recreational options are as abundant as career opportunities, the report said.

“Rising alternative cities have several characteristics in common: moderately priced housing, contemporary urban developments with amenities and strong transit-oriented infrastructure,” Trepp said. “The combination of compressed property capitalization rates and heavy competition from foreign investors in core markets is driving many investors foreign and domestic to alternative U.S. markets, particularly for retail investments.”