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Sluggish Issuance Volume Doesn’t Deter CMBS Investors

Penn Mutual Asset Management’s Jen Ripper expects CMBS issuance in 2019 to be similar to last year’s.


CMBS stats may be slipping, but investors are still finding ample buying opportunities among new issuance conduits, single asset, single borrower deals and commercial real estate CLOs. Although commercial transaction volume and mortgage originations both increased in 2018, U.S. CMBS issuance declined by about 12 percent to $76.98 billion last year, according to data from Commercial Mortgage Alert, an industry newsletter.

NREI recently talked with Jen Ripper, an investment specialist at Penn Mutual Asset Management, to gain insights on investor sentiment regarding CMBS and some of the trends that may influence the market in 2019. Ripper is responsible for research, trading and analysis of both CMBS and agency residential mortgage-backed securities (MBS) at Penn Mutual, which has $25 billion in assets under management.

NREI: Can you share any numbers on how active Penn Mutual is in CMBS?

Jen Ripper: For our Penn Mutual Life Insurance Portfolio, our allocation to CMBS is roughly 15 percent.

NREI: Has there been any shift in Penn Mutual’ s strategy as it relates to CMBS?

Jen Ripper: We’re a long-term holder of CMBS. However, our appetite for different sub-sectors within CMBS can change over time. Given where we are in the commercial real estate cycle, we have been a little more biased to stay up in credit quality. So, we’re a little more conservative in that regard staying up in the capital stack and a little shorter in duration.

NREI: Overall, how would you describe investor appetite for CMBS in the current market?

Jen Ripper: Generally speaking, appetite remains pretty healthy. We’ve seen that play out in the new issuance and secondary markets as we have seen spreads tighten in the early part of this year with investors looking to put cash to work.

NREI: New issuance was down in 2018. What do you think was causing that decline?

Jen Ripper: Part of the decline is due to the lack of CMBS loans maturing. The refinance pipeline is fairly small for CMBS securitized loans, which is part of the reason why issuance volume has been lighter than we have seen in previous years.

NREI: Does that create bigger implications for the investor marketplace? Is it more competitive to get the deals out there?

Jen Ripper: It can be a little more competitive. I would say though that the landscape of what is outstanding and what has been coming to market has been shifting. The agency CMBS market has remained very healthy in terms of issuance, and on the non-agency side, there is a shift from traditional conduit issuance to single asset, single borrower deals. And in the last couple years we have seen an uptick in commercial real estate CLO structures that have come to market. So, there is a little bit more variety now or a different mix of issuance than we have seen in the past. With issuance that is generally lighter than we have traditionally seen, investors also are looking to secondary markets as areas of opportunity to source investments in their portfolios.

NREI: Is there more buyer demand for certain products within those different options?

Jen Ripper: Broadly, I think there has been appetite in all areas. For single asset, single borrower deals, they typically come as floating rate paper. CRE CLO also is floating rate, and there has been big demand for floating rate paper in general, given the shorter duration aspects of those transactions. Single asset, single borrower deals are more often high-quality properties that allow investors to dig into the financials of the property and submarket and get comfortable on credit. So, I think there has been broad demand across the different sell sectors in CMBS.

NREI: What have you been seeing for pricing in 2019?

Jen Ripper: January was a really slow start to the year. We didn’t have much new issuance. [That lull is due in part to timing as deals are typically put on hold until after the CRE Finance Council Conference, which took place Jan. 14-16.] We did see a quick reversal of spreads in the early part of the year after the widening we experienced in December. Issuance volume picked up in February, with several deals that came to the market, and I believe they have all performed well and the secondaries have traded tighter since the issuance.

NREI: Do the new issuance deals that priced in February give any indication of what might be ahead for 2019?

Jen Ripper: Issuance isn’t necessarily steady throughout the course of the year. But overall, issuance volumes are expected to remain similar to last year.

NREI: Are there any concerns about eroding credit quality on CMBS loans?

Jen Ripper: Generally, the deals are fairly well-underwritten. However, you always have to watch out for credit barbelling within transactions. You want to look for things like loans with mezzanine or subordinate debt with loans that are pari passu, and what the diversification looks like within the pools. We are seeing some greater use of interest only loans. However, for full I/O loans, they are typically used on stronger properties in primary markets, but overall, I think the underwriting has remained in check.

NREI: How do CMBS investors view retail loans specifically?

Jen Ripper: There is some risk aversion there to retail properties, especially if it is [on] a single asset deal. But retail loans that are being secured with CMBS issuance are generally being underwritten more conservatively. So, you’re seeing quality retail properties coming into newer issue deals that have favorable demographics. We’re also seeing the concentration of retail overall in new issue transactions come down [from] what we had experienced in previous years.

NREI: Looking ahead to 2019, any other macro or micro-level factors that could impact the market this year?

Jen Ripper: In terms of macro, the broader economy is still doing well in support of commercial real estate fundamentals. I would expect that we would see continued growth in terms of property price appreciation, and net operating income on individual properties should remain positive this year—although the growth is slowing compared to what we’ve seen in years past. Of course, the CMBS market is always subject to broader market volatility caused by exogeneous shocks, but overall the market is in a healthy spot.

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