—By Sunny Sajnani, Principal / Director
In 2016, everyone was living in fear of the new “risk retention rules” and what they were going to do to the CMBS market. People were uncertain how the new CMBS playbook would affect investors, which resulted in slower issuances, significantly increased pricing, and tilted the playing field in favor of larger capital providers willing to keep risk on their balance sheets. Fast forward, risk retention worked as issuers are being disciplined in their underwriting and investors have been receptive by continuing to buy CMBS paper.
CMBS regained back some of the momentum it lost in 2016. In 2017, U.S. issuance reached $95.3 billion compared to $76 billion in 2016, according to Commercial Mortgage Alert. One reason why higher spreads didn’t materialize as anticipated is that there is a perception that risk retention boosted loan quality and investors are paying higher prices for the bonds that are being sold.
For 2018, MCA believes CMBS remains a competitive financing option, along with banks, life insurance companies, and private equity sources. There is always going to be a need for CMBS in the niche it plays, which is higher leverage and willingness to provide capital in secondary and tertiary markets. For many borrowers who want fixed-rate, non-recourse loans, CMBS is still the best option.
Several factors contribute to the anticipated decline in total issuance in 2018. The industry is approaching a tipping point being at the tail end of a lengthy economic recovery. Compounded by expected higher interest rates, fewer scheduled maturities, and limited refinancing opportunities, the CMBS market faces new challenges going forward.
Sourcing new CMBS loan opportunities could be a bigger challenge this year as the wall of maturities continues to shrink. Trepp predicts that U.S. issuance will decline to about $80 billion in 2018. CMBS lending peaked in 2007 with issuance that topped nearly $230 billion before plummeting to $12 billion in 2008. The pre-recession vintage loan maturities have come and gone.
With the wall of maturities in our review mirror, we expect a lower CMBS delinquency rate for 2018. Fitch’s overall US CMBS delinquency rate finished the year at 3.22%, which was 15 basis points lower than the previous month and 12 bps lower than a year ago, although delinquencies for the office and retail sectors were up from the year-ago period.
In summary, despite pockets of concern, the outlook for CMBS in 2018 is largely positive, bolstered by healthy capital inflows, stable credit performance, continued economic expansion, and relatively low interest rates. MCA has already secured over $100mm of CMBS loans in the first quarter of 2018, allowing us to monitor the market trends in real time. Please contact any of the Senior Directors at MCA for your long-term acquisition and refinance needs.
The author, Sunny Sajnani, is a Principal / Director in the Dallas office of Metropolitan Capital Advisors. Sunny may be contacted at [email protected] or 972-267-0600.