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SASB deal pushes issuance of CMBS to 14-year high

The CMBS industry is taking some time to celebrate a major milestone. Annual US issuances broke the $100 billion mark in 2021 for the first time since the boom years of the pre-Great financial crisis.

The $110.6 billion issued in 2021 is well below the record high of $227.6 billion recorded in 2007, but the 2020 number was more than double the 2019 level by 14.5 percent. commercial mortgage alert, The increase was primarily driven by both higher level of asset transactions and refinancing activity of borrowers taking advantage of lower interest rates. “Many borrowers are looking to lock in rates before the Fed starts, which could lead to a substantial Fed funds rate hike through 2022,” says Lisa Pendergast, executive director of the CRE Finance Council (CREFC).

According to Real Capital Analytics, strong asset values ​​and cheap capital contributed to record high sales activity last year with transaction volume rising to $808.7 billion. Manus Clancy, senior managing director and leader at Applied, says, “The fact that you have a lot of transaction volume has been reduced with people who are buying assets that often want to finance, which is something we have seen in the past. The year was a big driver of what I saw.” Data, Research and Pricing Department at Trap.

Despite the prospect of higher interest rates going forward, lenders are expecting another strong year in 2022. According to the Mortgage Bankers Association (MBA) 2022 Commercial Real Estate Finance Outlook Survey, lenders expect an average 5 percent increase or more in origination in capital sources. Clancy predicts that issuance of CMBS, including conduit, single asset single borrower (SASB) and CRE-CLO, could increase even more, from 10 to 15 percent.

LED Volume Lag

A closer look at the 2021 figures shows that the issuance is somewhat one-sided, with SASB deals totaling around $80 billion compared to $30 billion. Meanwhile, CRE-CLO lending, which is tracked separately from CMBS issuance, also posted a new record high number with $45.4 billion in funding in 2021—doubling from the $19.2 billion in issuance in 2019. , According to commercial mortgage alert,


Most loans that support SASB transactions are short-term, floating-rate loans that offer borrowers significant optionality relative to 10-year or 5-year fixed-rate loans, notes Pendergast. “If a borrower believes the asset has significant potential for income growth, why lock in a 10-year fixed rate loan today? I think this is why SASB volumes will remain strong in 2022 Furthermore, CMBS investors shy away from long-term assets if they have the option to go ahead with playing with the Fed given the outlook for higher rates, she adds. .

The CRE-CLO market is interesting because it offers loans secured by transitional assets. To the extent that transitional asset volumes decrease, CRE CLO volumes are likely to decline. Like SASBs, CRE-CLO loans offer borrowers significant optionality, Pendergast says. It is also important to take into account the bond investor side of the equation in both the SASB and CRE-CLO markets. “If institutional investors are of the view that rates are rising, floating-rate will be their first choice as they shy away from longer-term securities that will be negatively affected by rising rates,” she says.

One reason that conduit growth has remained relatively flat is that borrowers are increasingly turning to loans with more flexibility. Generally, CMBS is not suitable for borrowers who have a short-term hold strategy and who are flipping in and out of properties. However, CMBS does offer an incredibly good value proposition for long-term owners. Rich Highfield, chief of CMBS Lending at Greystone, said the concept of locking down a historically low rate on a 10-year loan, especially in a rising rate environment, is very attractive to a lot of borrowers.

It’s difficult to predict whether SASB’s dominance will continue, but Highfield expects the release of the groove to last a bit longer. “There was anemic drain volume in 2011 and 2012. So, part of what you’re seeing in the numbers is due to a lack of maturity in those prior years,” he says. There will be a marginal increase in maturity on 10-year loans made between 2012 and 2016.

Chilli Reception for Hotels

Another positive thing for CMBS is that crimes are improving. Crimes, which peaked at 10.3 per cent in June 2020, fell to 4.18 per cent at the end of January. According to Trap, both the hardest-hit sectors, lodging and retail, have registered significant improvement at 8.37 per cent and 7.96 per cent, respectively, with 30-day delays. There may be some obstacles on the way to office, but crimes are generally expected to continue to improve, notes Clancy.

Another positive sign for the CMBS market is that the concentration of retail loans has turned well. Highfield recently analyzed debt concentrations in the conduit. From 2014 to the start of the pandemic in early 2020, retail loans averaged 24 percent of the drain loan pool and hotels averaged about 14 percent. Retail and hotel loans fell sharply within the conduit after the outbreak of the pandemic. Retail averaged 15 per cent and hotels 5 per cent since March 2020.

However, recent drain deals show that retail debt concentration has resumed, while hotels are still anemic. According to Highfield, since June 2021, retail lending has averaged 26 per cent of the loan pool. “When you dive into retail lending, it’s the higher quality of retail,” he says. Credit is being given to strong kirana-langar centers versus unreserved centers and B and C malls. There are some hotel loans that have started coming back into the drain market. Those hotel loans that are being made are strong-performing properties where they reopened quickly or new hotels in destinations that are less dependent on group events.

The CMBS conduit market is in the midst of a transition which could help boost issuance. “It is expected that investors will see more retail and hotels performing well in these transactions. Also, look for short-term 5- and 7-year loans as demand for most investors will subside, but not all, for longer-term bonds,” Pendergast says. “We expect to issue more conduit in 2022. Hopefully, and it will be interesting to see how much collateral mix, loan terms and bond terms change in the 2022 fixed-rate drain CMBS,” she adds.

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