BofA’s Todd sees surging SASB market, higher rates hitting conduit originations

The conduit market has also seen strong growth so far this year, but this may not continue.

The single-asset/single-borrower commercial mortgage-backed securities market is surging, with almost $23 billion in new issuance year-to-date, while the conduit market is bracing for the impact that higher interest rates could have on new originations, said Alan Todd, managing director and head of CMBS strategy at Bank of America.

Year-over-year, SASB issuance is about $5 billion more than during the same period in 2021, when about $18.7 billion of new deals were done. Todd chalked up the rise to a number of factors, explaining SASB financing is an attractive alternative for many borrowers.

“In many cases, you’ve got floating-rate debt that offers less restrictive pre-pay options or disincentives. If you can buy something or refinance it and the expectation is that you can grow cash flows fairly quickly, it’s an attractive way to finance with non-recourse debt,” Todd told Real Estate Capital USA.

Additionally, there is a relationship between the SASB market and M&A activity in the commercial real estate space. “This is not for every borrower or every instance,” Todd said. “But to the extent there is an uptick in M&A activity, we see a somewhat commensurate increase in SASB activity.”

The conduit market has also seen strong growth so far this year, but this may not continue.

“The US conduit market is about 40 percent higher than it was this time last year,” Todd said, noting there has been about $10.7 billion of new issuance year-to-date. By comparison, there was about $5.9 billion during the same period in 2021.

“We’re starting to see signs that issuance is expected to slow down over the next quarter and part of that is that borrowing costs have risen so quickly,” Todd said. “If you tell a borrower your coupon is up by about 100 basis points in a month, it causes people to take a step back and reassess. To the extent the loan is maturing, they’re going to have to do something. But initially, it causes a little bit of a hiatus or pause.”

Manus Clancy, a senior managing director at New York-based data and research provider Trepp, LLC, agreed that so far this year, the conduit market hasn’t missed a beat.

“You would think with rising interest rates and the war in Ukraine, we would see some kind of lull. But we haven’t really seen that,” Clancy said, adding that conduit issuance for the first quarter is running at more than 50 percent above the same period in 2021. “We’re getting new deals and the deals are being priced at fairly tight levels. We haven’t seen a blowout in spreads that would indicate there is a buyer strike of volatility in the market.”

Todd believes the SASB and CRE CLO markets should remain relatively robust, even as the conduit market slows. There is another factor affecting conduit originations: the type of collateral that is being included in deals.

“You can’t put in a significant amount of hotel collateral given the performance issues that sector has seen. Investors in many instances are pushing back against commodity office,” Todd said.

Factors at play

The future of commodity office depends on several factors, Todd said, citing if a building’s footprint is commensurate with being renovated. There are other factors at play, including location.

“It’s hard to say that each will be dealt a similar fate. If people are moving to newer buildings that are better amenitized or perceived to be healthier, you’re going to see a bit of a vacuum in demand for older, less attractive assets,” Todd said. “The question will become, who owns it, how long have they owned it, what is their basis and what drives the decisions over whether to renovate it?”

In the new issue market, there has been a general trend of commercial mortgage-backed securities deals pricing wide of guidance, with Todd pointing to spreads that are about 10 to 25 basis points wider on conduit and commercial real estate collateralized loan obligations completed earlier this month. “We expect spreads may hold in well over the near-term but are likely to widen over the medium-term as the Fed raises rates and begins to engage in quantitative tightening,” Todd added.