CMBS market limps toward slow end to anemic year 

The decline in commercial mortgage-backed securities volume tracks a larger dip in transaction volume. 

Commercial mortgage-backed securities issuance is expected to end the year the same way it began – with a whimper, say market participants who spoke with Real Estate Capital USA.  

The CMBS market has seen private-label origination of $30.7 billion year-to-date, a 67 percent drop from the $92.4 billion seen during the same period last year, according to data from the New York-based CRE Finance Council.

Anuj Jain, director of CMBS strategy at Barclays, said uncertainty in the rate environment will further complicate potential transactions. “We have anecdotally heard there were some deals in the pipeline, [but] those didn’t reach the finish line because rates moved up so much,” he said. 

The drop in CMBS issuance tracks a broader decrease in transaction volume, both on the equity and debt side. An August report from New York-based data provider MSCI cited a 58 percent decline in transaction volume year-to-date, with a commensurate drop in all lending. 

Edward Shugrue, portfolio manager at New York-based CMBS manager Riverpark Capital, said he would be surprised if the market saw any meaningful volume.  

“It might be meaningful compared to the first, second, or the third quarter, but the issuance is really anemic,” Shugrue said, adding that he didn’t see a tremendous amount of demand from the CMBS buyer’s side. 

He continued: “There’s also not that many loans that demand refinancing right now, [because] they still have one or two-year extensions left.” 

Still, Shugrue also noted there will still be transactions on high-quality properties with low loan-to-value ratios. “People are going to transact, [but the deal has] got to be pretty exceptional, and pretty low leverage,” he added.  

All eyes on interest rates 

Manus Clancy, senior managing director at the New York-based data provider Trepp, said the current interest rates create a burden of borrowing costs that borrowers can hardly justify. 

“We’ve seen the yield on the 10-year Treasury jump another 50 basis points over the last month or so, and the five-year [Treasury] is also approaching 5 percent now. What you’re talking about is asking borrowers to lock in five or 10-year fixed-rate debt with coupons loan rates at 7-8 percent,” he said. 

Clancy noted more deals where a buyer can assume in-place debt could be in the pipeline. “We’ve seen a lot of that in the last six months, and we’ll see more of it coming back,” he said. He added he’s not as optimistic as he had been on Q4 CMBS issuance despite seeing a modest uptick in originations form in previous quarters. 

Barclay’s Jain also believes fluctuating interest rates could result in different debt-service coverage ratio that does not work for borrowers or can’t lead to proceeds borrowers want to get. But on the other side, the market could also come to terms with higher rates, which may make more transactions happen, Jain added. 

SASB market 

Single-asset single-borrower CMBS, loans that are backed by a single large commercial property or multiple properties under the same owner, have fallen by 85 percent year-over-year as of April 2023, but it still comprised a third of the CMBS market, according to a Goldman Sachs report. The fourth quarter could mark more SASB deals in the pipeline being completed by the end of this year. 

“We are definitely seeing some green shoots, especially on the retail and the lodging side,” said Jain, adding that a part of KSL’s acquisition of hotel real estate investment trust Hersha Hospitality Trust is expected to be completed via the SASB market. 

Following the refinancing of a $925 million loan on the Westfield Century City Mall in Los Angeles through a CMBS deal that was closed at the end of August, other notable SASB deals in Q4 include a $700 million CMBS loan that Brookfield Properties secured for its Oak Brook Center mall in Chicago, Illinois, and a $300 million SASB loan secured by City Center DC, a mixed-use development that predominantly operates office properties.  

“I would call these deals somewhat hopeful. It’s a mall and another case that’s mostly office that got refinanced, and that’s encouraging,” Clancy said. 

However, the office sector is expected to experience similar low issuance of SASB loans due to the distressed situation that has plagued the sector in the past 12-18 months. 

“Over the last three to five months, we have heard multiple times that some office SASB was in the works, [but] it didn’t materialize,” Barclay’s Jain added. 

“We’re definitely seeing some green shoots in Q4, [and it] should be slightly higher issuance than what we have seen this year, but there’s a lot of uncertainty because of how the rates environment has been,” Jain said.  

Loan performance 

Trepp tracked a rise in the CMBS loan delinquency rate in August to 4.39 percent, a 14-basis point increase from July. The uptick was attributed to a sharp increase in the office delinquency rate, which rose from 5.07-5.58 percent during the month. Trepp’s CMBS special servicing rate also rose five basis points in August to 6.67 percent, marking the seventh consecutive monthly increase. 

“As a lot of 2021-issued SASB and CRE CLO come due, we expect to see things keep worsening. And then in the office sector, as more leases roll over, they will expect more delinquencies to happen. But again, we expect it to be a slow-moving situation, at least in the conduit market,” Jain said, adding that while the delinquency and special servicing rates have slowly increased as expected, the market hasn’t seen a major deterioration in loan performance. 

Overall, analysts said commercial real estate market activities remain subdued owing to elevated interest rates, rising construction costs, and cautious lending strategies that commercial banks took since the volatility in the finance system induced by bank failures in March 2023. 

Clancy further noted that except for insurance companies, three out of four lending pillars in commercial real estate finance, which refer to CMBS, banks and alternative lenders, are all constrained to various extents.  

However, Clancy noted the market’s dynamics are not comparable to the level it saw during the previous global financial crisis. 

“It’s not 2008. From 2008 to 2010, we saw no lending. We are seeing some lending now. It’s like a clogged artery that is operating inefficiently, but it’s not a closed artery,” he said.