The risk retention deals appear to be showing well in the investor community, Pendergast says. “The underwriting is tight, the collateral is strong and investors seem to truly appreciate that the issuer has skin in the game.” The talk is that B piece investors are willing to accept modestly lower yield in return for this better written collateral, she says.

B piece investors particularly like the double safety that an L-shaped deal structure offers — that is, a combination of the issuer's skin in the game and deal collateral review by the B piece, according to Pendergast.

(Briefly, the risk-retention requirement calls for originators to retain at least 5% of the credit risk using either 1) a vertical interest structure, in which the sponsor retains 5% of the face value of each class of securities; 2) a horizontal interest in which the sponsor retains 5% of the most subordinate class; or 3) an L-shaped combination in which the retained interest consists of at least 5% of the value of the transaction held through a combination of a vertical and horizontal interest).

About That Originations Drop

So how to account for the drop in originations in the first quarter? There are a couple of reasons that could be behind that, Pendergast says.

There is some uncertainty about policy right now with a new Administration and borrowers have been reticent to step up given up the forthcoming changes in the tax code and a possible infrastructure bill, Pendergast says. Also, originators cleared out their pipelines to put their collateral in the risk retention compliant deals that went to market last year as trial balloons. That could well explain why no deals were issued in January, according to Trepp.

“We will have a better gauge about where CMBS is going this year in the months to come,” Pendergast says.

WASHINGTON, DC–Depending on who is counting and by what methodology, CMBS originations for the first quarter of this year are down anywhere from 18% to 34% compared to the same period in 2016.

It is easy to attribute the drop to Dodd Frank's risk retention rule that went into effect at the start of the year but the story is more complicated than that.

The CMBS market is doing better than many thought it would at the outset of risk retention, Lisa Pendergast, executive director of the Commercial Real Estate Finance Council, or CREFC, tells GlobeSt.com. Investors, especially B piece buyers, have responded well to the offerings that comply with the rule that have come to market, she says. “Spreads have done well compared to last year,” she says.

What Investors Like About Risk Retention

The risk retention deals appear to be showing well in the investor community, Pendergast says. “The underwriting is tight, the collateral is strong and investors seem to truly appreciate that the issuer has skin in the game.” The talk is that B piece investors are willing to accept modestly lower yield in return for this better written collateral, she says.

B piece investors particularly like the double safety that an L-shaped deal structure offers — that is, a combination of the issuer's skin in the game and deal collateral review by the B piece, according to Pendergast.

(Briefly, the risk-retention requirement calls for originators to retain at least 5% of the credit risk using either 1) a vertical interest structure, in which the sponsor retains 5% of the face value of each class of securities; 2) a horizontal interest in which the sponsor retains 5% of the most subordinate class; or 3) an L-shaped combination in which the retained interest consists of at least 5% of the value of the transaction held through a combination of a vertical and horizontal interest).

About That Originations Drop

So how to account for the drop in originations in the first quarter? There are a couple of reasons that could be behind that, Pendergast says.

There is some uncertainty about policy right now with a new Administration and borrowers have been reticent to step up given up the forthcoming changes in the tax code and a possible infrastructure bill, Pendergast says. Also, originators cleared out their pipelines to put their collateral in the risk retention compliant deals that went to market last year as trial balloons. That could well explain why no deals were issued in January, according to Trepp.

“We will have a better gauge about where CMBS is going this year in the months to come,” Pendergast says.