With risk retention fears largely behind the CMBS industry, issuance activity is expected to pick up in the next quarter. But although industry insiders feel okay about issuance activity so far this year, all eyes are on the second half of the year as a significant volume of 2007 legacy loans come due.
About $15.2 billion in U.S. CMBS loans have been issued year-to-date, according to Commercial Mortgage Alert, an industry newsletter. The figure is roughly 20 percent below the $19.2 billion in CMBS loans issued during the same time period in 2016.
By the end of the second quarter, investors can expect to see $30 billion in issuance, according to Manus Clancy, senior managing director at Trepp, a CMBS and commercial mortgage research firm.
Industry sources, including Clancy, forecast total issuance for the year to range between $60 and $70 billion. Total issuance for 2016 reached $75 billion, according to Commercial Mortgage Alert. Trepp records the figure at $68.8 billion.
“The feedback I am hearing from the industry is that large loan single-asset securitization has been pretty popular so far this year, because life companies can only do a certain size loan. That could end up driving the total to over $60 billion,” says Gerard Sansosti, executive managing director at capital services provider HFF.
The second and third quarters of the year will be more active, Sansosti says, as loans are being closed now that will be securitized in the next month or two.
“Back in November 2016, if you asked people how they would feel about $60 billion issuance in 2017, they would say it feels pretty good, People are feeling satisfied with the pace of issuance this year,” says Clancy, adding that in this quarter about 20 deals should get done.
Risk retention ‘well-received’
Last year, some of the CMBS industry’s concerns focused on the implementation of risk retention rules, a part of the Dodd-Frank Act meant to ensure banks kept a reserve on all loans for asset-based securities. The rules became effective in December, 2016. Early efforts at risk-retention-compliant deals done in the second half of last year were “well-received,” according to Clancy.
The risk retention structures used by the industry “have been working” and “there has not been a huge impact on pricing,” notes Sansosti.
But contending that the banking regulations are too onerous for lenders to bear, Republicans are moving to “gut” Dodd-Frank, the New York Times reported last week.
CMBS lenders are currently “craving product and pricing at similar interest rates to life companies, but going deeper into the capital stack and offering more interest only,” according to a Capital Markets Update released April 20 by commercial real estate services firm Cushman & Wakefield. In one example of a recent deal, a CMBS lender completed fixed financing on an industrial asset at 75 percent loan-to-value (LTV) ratio for a 10-year term, with 30-year amortization, two years interest-only, with a spread of 180 basis points. An office asset secured fixed financing at 70 percent LTV for a 10-year term with interest-only amortization, at a spread of 209 basis points. A high-street retail asset with 57 percent LTV received a fixed-rate 10-year loan at 57 percent LTV with interest-only and a spread of 147 basis points.
Reading the tea leaves on refinancing
As the industry continues breaking through the wall of CMBS maturities, trying to decipher exactly how many loans will be problematic has occupied a lot of analysts’ time.
About 47.45 billion in CMBS loans is projected to mature between April and December 2017, according to Steve Jellinek, vice president of CMBS analytical services at Morningstar Credit Rating.
The question is what happens in the second half of the year, as 2006 was back-end loaded with new loans and 2007 was front-end loaded, says Sansosti. “We will have to see how it plays out.”
So what characteristics are lenders looking for in determining which loans to refinance?
As long as the original loan featured LTV of under 70 percent, it should be easily refinanced, according to Sansosti. For loans with LTVs higher than 70 percent, some mezzanine debt will be needed. Properties that are well-leased and have long-term tenants in place will also be more easily refinanced, Sansosti notes. One pain point will involve middle-market malls, which are going to be difficult to refinance.
“The bar is definitely higher on retail to get refinancing,” says Clancy. Borrowers will need higher debt service coverage ratios than they did three to four years ago. Malls that are only garnering in-line store revenue of $350-$400 per sq. ft. may concern some lenders, he adds. A more comfortable figure for lenders will be $550-$600 per sq. ft. in in-line revenue.
In one developing trend, Sansosti says he sees a good portion of borrowers securing floating rates when coming off maturing loans. “That’s about end-of-cycle risk,” Sansosti notes, adding that 50 percent of HFF’s business year-to-date has been floating rate business. “It offers flexibility. People don’t want to be locked in for 10 years, they are thinking about what they want to do with their properties” as the cycle progresses, he says.