The borrowers who depend on CMBS loans can breathe a little easier.
“CMBS has come back substantially and all CMBS lenders are quoting and actively chasing deals,” says John Manning, managing director for commercial real estate services firm JLL.
After a rocky start to the year, lenders are once again making a significant number of CMBS loans. These types of loans are often important for apartment borrowers who need smaller loans or financing for Class-B or Class-C apartment properties. Interest rates for CMBS loans are now almost as low as the rates on offer last fall. However, CMBS lenders are still cautious, offering smaller loans relative to the size of the property.
Early this year, shock waves rolled through the financial markets as investors worried about bad news from major world economies like China and Europe and stock markets fell sharply.
Average yields for AAA-rated CMBS notes rose to 175 basis points over swaps in early 2016, up from 125 basis points a few months before, according to Richard Katzenstein, senior vice president and national director with Marcus & Millichap Capital Corp.
“Few deals priced in the market in January and there was an uncertainty in the appetite for CMBS bonds,” says Manning. “At the time, volume was slow and borrowers were better off waiting to close once things settled down, if they had the option to.”
With fewer borrowers choosing CMBS financing because of these high interest rates, financial firms have issued a lot fewer bonds. CMBS issuance so far in 2016 is down 41 percent from this time in 2015, according to data from Commercial Mortgage Alert. “Only a small volume of multifamily loans have gone CMBS this year,” says Mitchell Kiffe, senior managing director for debt and structured finance in the capital markets group of commercial real estate services firm CBRE.
Other types of lenders took up most of the business that CMBS left behind. “Life insurance companies, as well as agency lenders ramped up, and were seeing the vast share of the fixed-rate, long-term business,” says Manning. Fannie Mae and Freddie Mac are both expanding their programs to lend to less-expensive class-B and class-C apartment properties.
Borrowers who depend on CMBS lenders have been relieved by their return, spurred by more calm in the financial markets. “CMBS lenders are quoting more loans today than 30-to-45 days ago, spreads have decreased materially,” says Kiffe.
Borrowers can now get a typical CMBS loan that covers 70 percent of the value of an apartment property, with an interest-only period of three years or less at an interest rate of 275 to 300 basis points over swap rates. That’s slightly higher than the rates offered by lenders like Fannie Mae and Freddie Mac.
Tougher underwriting for CMBS
Still, CMBS investors have not completely recovered their appetite for risk. The buyers of B-piece CMBS notes prefer loans that cover a relatively small amount of the value of a property. As a result, conduit lenders offer interest rates as low as 185 basis points over swaps for conduit loans that cover less than 55 percent of the value of a property, says Katzenstein.