The US conduit market, a segment of the broader commercial mortgage-backed securities market, is gearing up for another relatively weak year of issuance.
Conduit deals accounted for just 19 percent of private label issuance in 2021, down from 45 percent in 2020 and 81 percent a decade ago.
“We think it looks a lot like 2021 from an issuance perspective,” Alan Todd, managing director and head of CMBS research at Bank of America, told Real Estate Capital USA.
That means borrowers are more likely to seek floating-rate loans that could be securitized via the commercial real estate collateralized loan obligation structure or opt for a single-asset/single-borrower execution. Loans securitized via these structures are generally floating rate.
“Borrowers are looking to take out floating-rate loans [and] take advantage of the prepayment flexibility,” Todd said. Many borrowers are seeking loans on transitional assets, which cannot be financed via the conduit market.
One final factor, the refinancing pipeline is light. Todd estimated that about $5 billion to $10 billion of refinancings could be completed this year.
“If you think about the refi pipeline, it’s still kind of small. It doesn’t pick up until 2023 2024,” Todd added.
Structuring conduit deals
Lenders continue to be cautious on originating loans in the hotel and office sectors, which had historically accounted for a significant portion of conduit issuance.
“Because of hotel performance, it’s very difficult to put hotel loans into conduit deals. So, what you then have to do is build a pool and distribute [the loans] among the remaining property types. However, people are, to a certain extent, uncertain about what I’ve been calling commodity office [and] they’re pushing back on that,” Todd said.
Additionally, there has been a shift in thinking around large loans that might have previously been broken up and securitized in multiple conduit deals. A $200 million loan that in the past might have been split among several pools is now being securitized in a stand-alone deal.
“Historically, we used to, as an industry, put loans [in conduit deals on a] pari passu basis but even investors are pushing back saying this reduces diversification. And from the issuer perspective, they can securitize a $200 million loan in the SASB market,” Todd said.
Still, conduits retain some attractiveness for borrowers and investors. With interest rates set to rise multiple times this year, the prospect of locking in a fixed rate could grow more appealing in the coming months, Todd added.