CMBS market steady despite widening spreads

Fed cited "noticeable" market conditions in Sept. minutes

Despite concern from some – including the Federal Reserve – about widening spreads on investment-grade commercial mortgage-backed securities, metrics on CMBS issuances and falling delinquencies indicate a fairly sunny outlook.

In minutes detailing the Federal Reserve’s meeting last month – in which the Fed decided it would maintain interest rates near zero – the central bank noted that spreads on CMBS “widened noticeably in August, reportedly a result of heavy issuance as well as the increased volatility in broader financial markets.”

But analysts have pointed to metrics indicating such conditions as more of a temporary blip than a sign of a more pronounced slowdown in the controversial market.

“There has been a widening of spreads,” Sean Barrie of CMBS analytics firm Trepp told The Real Deal, citing “a lot of deals stacking the opposite ends of the spectrum” in terms of loan-to-value ratio. Barrie noted, however, that so far October has “seen spreads stay even keel,” which he characterized as a “good sign.”

Widely viewed as the sparkplug to the financial crisis in 2008, the CMBS market has returned with a vengeance this year. In the first half of 2015, new securitized loans based on New York City properties rose 47 percent year-over-year, climbing from $7.83 billion to $11.54 billion — the highest total in the first half of any year since the crisis, according to Trepp data.

Essentially, securitization allows a bank or lender to issue a mortgage, then re-package it into bonds tied to the loan’s performance and sell them off to investors. The lender is paid to securitize the loan, and uses that payment to issue additional mortgages, creating a high volume of packaged loans for potential real estate investors.

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Also boding well for the rising CMBS market is that delinquency rates — the number of loans that have delinquent payments divided by the total number of loans held by the institution — fell around 17 basis points in September, to 5.28 percent across all property types, according to Trepp.

Data from credit ratings agency Fitch, meanwhile, pegged that number at 4.46 percent in September – down six basis points from August and down 31 basis points year-over-year.

CMBS issuances, however, slowed down in early September. Total issuances in the third quarter was $22.1 billion – the third consecutive period of declining volume in the CMBS market – to bring the year-to-date total to $73.6 billion, Trepp said.

While issuances were projected to hit $115 billion to $125 billion in 2015, the firm now expects total issuances between $100 billion to $105 billion this year.

Still, dropping delinquency rates and relative strong issuance volumes has analysts bullish on the CMBS market’s outlook. “We like what we see,” said Barrie, adding that while “a lot of people thought we’d see a huge spike in issuances, the market’s leveled out.”