Lisa Pendergast, the executive director of the Commercial Real Estate Finance Council, believes there is a lot to be optimistic about as the US commercial real estate debt markets move into a new year, including a surge in loan refinancings that will drive lending activity and an easier-than-expected adoption of the Secured Overnight Financing Rate as an alternative to LIBOR.
Spreads on commercial mortgage-backed securities and commercial real estate collateralized loan obligations are tight, which points to strong demand for the securities.
“There has been strong interest in CMBS and CRE CLOs,” Pendergast told Real Estate Capital USA. “The fact that bond spreads on CMBS and CRE CLOs has remained very tight is a good indication of demand.”
Pendergast also cited significant number of loans slated for maturity this year as a potential boon for refinancing activity. “I think what we’re seeing is there’s a significant balance of loans that are maturing, that need to be refinanced, and folks are going to want to do that sooner than later,” she added.
Despite broader concerns about inflation and looming intertest rate hikes, Pendergast sees the Federal Reserve’s growing commitment to quelling inflation as a positive sign for real estate finance and the economy more broadly. “I’m glad the Fed has decided that [inflation] is not transitional, and that they think that they need to address it,” Pendergast said.
With the Federal Reserve indicating three to four interest rate hikes in 2022, Pendergast expects the beleaguered conduit CMBS market, which is almost exclusively made up of fixed-rate bonds, to see increased interest from borrowers eager to secure favorable debt before it goes away.
“The prospect of higher interest rates means that more borrowers could move to lock in rates,” Pendergast said. “When you start to see rates back up, anybody who has something on a floating-rate basis is going to want to lock in today’s rate, so that two years from now, they’re not looking at something that’s 300 to 400 basis points higher.”
LIBOR to SOFR
So far, the much anticipated transition away from LIBOR, which had its sunset on December 31, has caused little to no distress for real estate securities. SOFR has emerged as the preferred LIBOR replacement, yet with LIBOR deals not completely phased out for another 18 months, there is still uncertainty about how the post-LIBOR market will look.
Pendergast said she is somewhat concerned about the market overwhelmingly picking one benchmark to replace LIBOR, which could have an impact on bonds that reference another benchmark.
“At some point, if you ever coalesce around one benchmark, whatever isn’t that benchmark could possibly trade back poorer. You’re kind of the also-ran benchmark, you’re a little different than the rest,” she added.
As for now, Pendergast sees SOFR playing a larger role in CRE securitization. “There will be seeing CMBS deals that are issued, probably in the next three weeks that are going to reference SOFR,” Pendergast said.