Conduit market gears up for year-end surge

Expectations are that there will be $5bn-$7bn of new conduit issuance in the fourth quarter, market analysts told Real Estate Capital USA.

The US commercial mortgage-backed securities market is preparing for a stronger finish to 2023 after a tepid year of issuance.

Expectations are that there will be $5 billion-$7 billion of new conduit issuance in the fourth quarter, market analysts told Real Estate Capital USA. This contrasts with the bulk of 2023 where, as of mid-November, data from the CRE Finance Council tracked CMBS and commercial real estate collateralized loan obligation issuance totaling $38.2 billion. This is a 63 percent drop from the $104.5 billion for the same period in 2022.

“In past years, we have seen many years in which Q4 has been very, very strong and a sizable uptick in deal issuance. We are not expecting that right now,” said Manus Clancy, senior managing director at the New York-based data provider Trepp.

Despite the uptick in issuance expected through year-end, commercial real estate lending will remain subdued in the fourth quarter. This will translate into smaller CMBS deal sizes as well, Clancy added. Still, one positive signal is that deals in the pipeline have exposure across sectors including office, retail and hotel, a sign that the market is opening for various property types.

“The green shoot for the market is that some lending is happening, and it is happening across every property type. This is not 1990 or 2008 at this point. Activity is still taking place albeit at a slower pace,” Clancy said.

This diversity of collateral was seen most recently in BMARK 2023-V4, a $626.6 million conduit deal priced in the second week of November. The deal’s collateral included a 25.1 percent hotel concentration, with office properties taking up 22 percent and retail properties comprising 20 percent, according to Fitch Ratings’ presale report.

Anuj Jain, director of CMBS strategy at Barclays, said new conduit loans’ exposure to the office is largely low risk.

“It is hard to get a loan on an office property if it has a huge vacancy [or] a huge rollover coming. [For] all the [loans] that are being done, the assets have long leases in place. From an investor’s perspective, the risk is well contained,” Jain said.

As for loan structures, analysts note the five-year CMBS conduit loans will be equal to, or slightly outpace, the 10-year loans in terms of volume. “We didn’t even have five-year conduit loan products in our industry a year ago, and it’s really taking on a lot of popularity,” Clancy added.


The broader financial markets saw a significant drop in interest rates in the first half of November after the the 10-year Treasury yield rose to 5 percent in early October. Since then, it has moderated to around 4.5 percent, and credit spreads are also sharply tightening.

“What you [saw in early November was] the 10-year cost of borrowing has dropped about 70 basis points, which could provide a tailwind for things to pick up in Q1 2024,” said Clancy, adding that the impact of the tightening spreads may not be felt by the lending market as soon as in Q4 this year.

Given that there is a lot of capital on the sidelines, once the interest rates start to level off and spreads continue to compress, investors will jump back into the market sooner rather than later, analysts said.

“If you go back to last year, not only did we have the rates sell off, but we also had concerns about how the economy is going to do and [the potential for a] recession,” Jain said. He added that the improved macroeconomic outlook did provide a tailwind to commercial real estate sectors such as retail and lodging.

“We think next year CMBS [transaction] volumes can increase 20-25 percent, [but] we will also see more price declines in office and multifamily.”