Quality of CMBS loans improves as market tempers

Commercial Mortgage-Backed Securities lending made a comeback in 2017, growing to $95.4 billion – a 25.6 percent increase over 2016; the second-highest since 2007.

15 février 2018

And, while the outlook for 2018 is more tempered – forecast between US$60 and US$80 billion in the U.S. – the dip could be a good thing for investors, says Tom Fish, Co-Head of JLL Capital Markets, Finance.

There is increasing competition for a slice of the lending pie says Fish, explaining that the size of the CMBS market is “where it should be at this point in the cycle, and continues to provide a valuable alternative to property types that be restricted in institutional funding because of lender selectivity.”

These property types include unanchored retail centers and hotels which have both benefited from the recent strength of the CMBS market. Issuance of floating CMBS loans in the hotel sector grew from US$2.7 billion in 2016 to nearly US$14.5 billion in 2017, according to JLL data. Those loans, which are typically US$200 million or larger, have been one of the stars of the hotel market’s current run and have facilitated a number of large refinancing and acquisitions.

Several factors including a softening of transaction volumes and cap rate stability likely point to a more stable year for CMBS across sectors, according to Jamie Woodwell, Vice President of Commercial Real Estate Research for MBA.

“2017 marked the end of the so-called ‘wall of maturities’. It also marked an important turning point in the CMBS market. For the first time since the Great Recession, we now have more in new loans being made in CMBS than in old loans paying-off and paying down.”

The increasing balance is a mark of renewed interest and strength.

The measured CMBS market is also benefitting b-piece buyers – those purchasing subordinate bonds.

2018 has already seen strong b-piece activity with Prime Finance opening two funds for a combined US$1.3 billion, and homebuilder Lennar putting its Rialto Capital subsidiary up for sale.

“Disciplined underwriting and the perception that risk retention rules have improved loan quality in the CMBS market is making b-piece investment more attractive,” said Fish. “The amount of CMBS issuance is something the b-piece market can digest readily, especially given the growing concentration of b-piece buyers.”

“Barring any macroeconomic shocks or some sort of huge interest rate change, 2018 will be a solid year for the CMBS market,” he added.

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