NEW YORK CITY—It's not entirely accurate to compare the CMBS market to The Little Engine That Could. Yet like the locomotive in the classic children's book, the market definitely picked up steam as the current year went along.
“Although some in CMBS initially anticipated lower lending volume in 2017 as a result of regulatory uncertainty, strong securitization activity has led many industry participants to revise their annual issuance estimates for the year,” according to Trepp LLC's third-quarter summary of sector activity. Total issuance for the year is now expected to reach upwards of $85 billion— “and should easily surpass last year's total which came during a time of global uncertainty and macro volatility.”
That's in contrast to a forecast from S&P Global Ratings as recently as this past July, which saw the CMBS issuance tally for this year staying “roughly flat” from the 2016 total of $76 billion. On the flip side, says Trepp, “many still believe that issuance is running well below the expected pace considering the large maturing volume.”
Trepp notes that approximately $26.8 billion in private-label securitized mortgages officially cleared the issuance pipeline between July 1 and Sept. 30, thereby making Q3 making it the most active quarter for the CMBS industry in three years. Six months earlier, though, it was a difficult story: the market hadn't yet digested the implications of the risk retention rules mandated by Dodd Frank, and Q1 saw just $10.5 billion of new issuance.
Q2 was a different story, though, as the quarter's volume more than doubled the Q1 tally with $21.2 billion in new securitizations. “The Q3 total of $26.8 billion brings year-to-date issuance to $58.6 billion through the first nine months of the year, which is a 38% increase in volume compared to the same period in '16,” according to Trepp's report.
The quarter that ended Sept. 30 also reaffirmed the prevalence of the “vertical” structure in CMBS securitizations under the new risk retention rules. Sponsors and third-party investors of all asset-backed securitizations now are required to hold either 5% of each class (the “vertical” structure), 5% of the market value of all the classes (the “horizontal” structure) or a combination equal to 5% of the vertical and horizontal structures (a “hybrid” structure). By dollar volume, nearly 50% of Q3's deals employed vertical structures, which are especially popular with lenders in the single-asset space, says Trepp.
By asset type, lodging properties dominated new CMBS issues in Q3, according to Trepp. “While the sector only represents about 15% of the total CMBS universe, lodging properties backed 36.42% of all CMBS debt issued between July and September of this year,” according to Trepp's report. On a YTD basis, just over 25% of all new CMBS issues were hotel loans, making issuance backed by lodging properties the second-highest total among all property types, with only office amassing a higher tally. Trepp says much of this momentum can be attributed to “greater acquisition, financing and sales activity from hotel operators seeking international expansion via brand procurement and consolidation strategies.”
Other property types accounted for a considerably smaller share of the pie. Due to “tepid” investor sentiment when it comes to the retail sector, Trepp says that quarterly issuance tied to mall and shopping centers once again came in lower than that of previous periods, and represented just 15% of the Q3 total. new multifamily issues rose to $1.7 billion, comprising 6.24% of the Q3 total, while industrial properties only backed $461.4 million in new issuance for 1.72% of the quarterly total.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
