New issuance market CMBS reboots as pipeline builds up

The US commercial mortgage-backed securities market saw two conduit deals priced last week, the first new offerings of this kind to be completed since the start of the war in Ukraine. One key difference: spreads on the benchmark AAA-rated, super senior bonds are clearing at levels that are more than 20 basis points wider than conduits completed prior to the start of the war.

The news that two conduit deals had been completed was an important milestone for the US debt markets, market participants told Real Estate Capital USA.

“The big question was, ‘Would we see another [conduit] for a while or would people just stop?’” Manus Clancy, a senior managing director at New York-based data and analytics provider Trepp, told Real Estate Capital USA. “The answer is people haven’t stopped. In fact, two [deals] have priced and two more are ready to go.”

The securitization markets are in fact gearing up for a robust quarter, with Bank of America research reporting that there are 22 private label deals in the pipeline totaling more than $15 billion. This breaks down into 14 single-asset/single-borrower deals of about $7.7 billion, six commercial real estate collateralized loan obligations totaling about $3.6 billion and five conduit deals coming in at roughly $3.8 billion.

As of March 25, CMBS and CRE CLO issuance hit $43.2 billion, an 80 percent increase over the $23.9 billion seen in the same period in 2021. “Conduit issuance through March 25 is $9.3 billion, 20 percent higher than the $7.8 billion for the same period last year,” added Raj Aidasani, a senior director of research at the CRE Finance Council.

Aidasani noted that while spreads widened in the wake of the outbreak of the war in Ukraine in February and early March, things are more stable. “Spreads on the 10-year super-senior AAA conduit CMBS ended the week of March 25 at 100 basis points, unchanged from the previous week. AAA spreads are wider by approximately 25 basis points year-to-date. Spreads on 10-year BBB- conduit CMBS closed at 410 basis points for the week of March 25, also unchanged from the prior week [and] BBB- spreads are wider by approximately 45 basis points year-to-date. The spread widening was more acute at the top of the capital stack as compared to BBB- when compared to previous sell-off periods. This points to a reflection of the market’s view that commercial real estate fundamentals should remain strong.”

Higher rates impact

One potential stumbling block for the conduit and broader CMBS market, however, could be the impact of higher interest rates. The benchmark 10-year Treasury is trading at around 2.4 percent, a big jump from the roughly 1.78 percent at the start of the year. The Federal Reserve earlier this month increased the federal funds rate by 25 basis points, with the promise of additional hikes over the next two years.

Higher rates could make the CMBS equation more complicated for borrowers and lenders. While a lender could still originate a loan with a relatively low loan-to-value ratio, higher rates could affect a property’s debt-service-coverage ratio, a factor that is widely seen as a more important metric of a property’s financial health. “Every uptick in rate means less proceeds that the lender is willing to give you,” Clancy added.

So far, however, this level of disruption hasn’t yet been seen.

“The whole business model for CMBS is [to] lend, hedge, securitize,” Clancy said, noting that CMBS lenders hedge against wider spreads via CMBX and higher interest rates through Treasuries. “The big concern is that somehow spreads blow out more in cash than CMBS and the hedges break. Thus far, that hasn’t happened [and] it’s been staying correlated.”

Lenders have been giving themselves more room for error. “So far, that’s been okay. People are still lending,” Clancy said.