CMBS issuance in the first half of the year was far below expectations, as stock market volatility and worrying global economic news took their toll. Fallout was most apparent in the second quarter, but now sources say CMBS spreads are recovering and the financing tool will again attract investor attention.
“The big hiccup in the U.S. equity markets led to a blow-out in spreads. This resulted in a period of about 60 to 90 days of low origination volume by CMBS issuers from January until April. During this time, CMBS issuers did not quote loan spreads or quoted them so widely that borrowers looked elsewhere,” says Manus Clancy, senior managing director of applied data at research firm Trepp LLC.
The second quarter dip resulted from “disconnection in the first quarter, when a number of deals were re-priced and did not close, says Gerard T. Sansosti, executive managing director of Pittsburgh-based capital markets services provider HFF.
Total 2016 CMBS issuance year-to-date stands at $36 billion, according to Trepp data.
"The year started out with most market participants thinking 2016 would be very busy. There was over $100 billion in loans set to mature in 2016, and everyone in the industry expected over $100 billion in CMBS refinancing activity alone,” says Lea Overby, managing director of structured finance research at research firm Morningstar.
More likely, there will be approximately $50 billion in CMBS issuance by the close of 2016, Clancy says, a forecasted 40 to 50 percent decrease from 2015 issuance levels. HFF forecast is similar, with approximately $55 billion in CMBS issuance expected by year-end.
The second half of the year, however, will likely be much more active than the first, market sources say. In July, U.S. CMBS issuance totaled $6.2 billion, signifying one of the more active months of the year, according to Commercial Mortgage Alert, an industry newsletter. In August, issuance came to $4.4 billion. These figures came in after a dismal June, when the market saw only $1.7 billion in CMBS issuance, the lowest level since at least 2014.
“Since the second quarter, spreads have bounced back, reaching their tightest levels of 2016. We anticipate the last three months of 2016 to be very busy,” according to Clancy.
Sansosti says he is optimistic that CMBS will recover, due to better pricing, less volatility and lack of competition as life companies and agencies approach annual capacities. “This should definitely affect larger transactions which should help CMBS numbers,” he says.
CMBS is “still the best option” for borrowers needing non-recourse financing at 70 to 75 percent loan-to-value (LTV) ratios.