Trepp’s Clancy sees CMBS about-face as new issues reignites

The debt markets have shown signs of life in recent weeks. Is it sustainable?

After a skittish start to the summer due to interest rate hikes and growing inflation, the sluggish new issue commercial mortgage-backed securities market has once again picked up its pace, according to Manus Clancy, a senior managing director at New York data and analytics provider Trepp. 

There have been two new conduit deals launched into the market in the past two weeks, which is a positive sign. Additionally, there have been a handful of single-asset/single-borrower deals and the CRE CLO market, which saw a similar slowdown, is also seeing signs of life.  

“Over the last 10 days, we’ve returned to risk-on mode,” Clancy told Real Estate Capital USA. “The June CPI numbers seemed to really tilt sentiment negative, along with the big equity sell off and big spike in interest rates. We were in bearishness mode for a couple of weeks and that lasted about six weeks or so.” 

And while CMBS is not directly correlated to the broader equity markets, it has rebounded along with the major indices over the last couple of weeks.  

Still, it remains to be seen whether the CMBS market can keep the momentum going. The Federal Reserve is expected to raise interest rates at least two more times before the new year to combat slowing, but stubborn inflation, Clancy added.  

Even if the economy goes into an inarguable recession and CRE debt goes into a bear market, Clancy believes CMBS is in a better position than just prior to the global financial crisis. This is partly due to lower leverage and more liquidity. But there is also a gradual change in attitude over the past 10 years that has helped. 

“We’ve been through several crises now where it seemed like the world was going to end, the biggest one in 2008. And yet, conditions never get as bad as people think they’re going to be for the most part, and I think that over time people get more confident,” Clancy said. 

Clancy noted that the selloff of CMBS a decade ago led to many contrarian investors buying valuable bonds for bargains. He doesn’t see that happening now. 

“Right now, it seems like every time spreads blow out and we’re seeing, you know, five or 10 point moves in BBB- or double B or something like that. There’s somebody ready to swoop in and buy now,” he said.