CMBS Market Will Continue to Deteriorate This Year

The CMBS market will likely continue to deteriorate through the end of the year as the pandemic wears on. This year, the CMBS market was hit immediately by the pandemic, and while the market has rebounded, certain loan classes will continue to deteriorate. Next year will offer better insight into the lending platform.

“It is likely we will see continued deterioration in the performance of various mortgage loan classes as we move closer to the end of 2020,” J.D. Blashaw, VP at MetroGroup Realty Finance, tells GlobeSt.com. “In March and April, there was immediate deterioration in some asset classes, like hospitality and retail, when the COVID-19 pandemic hit. We anticipate to see the effect the pandemic will have on office properties more clearly in 2021.”

It isn’t surprising to see lenders avoiding hospitality and retail assets, the two asset classes hit hardest by the pandemic. However, office assets—which face a lot of uncertainty—are also a red flag for cautious lenders. “We already see lenders being very selective with city center office showing a preference for suburban office. We expect it to continue to be extremely difficult to finance any hospitality properties,” says Blashaw. “The only retail that is being considered today by the capital providers are essential retail, like grocery and drug, or properties with credit tenants with long-term leases.”

However, lenders continue to actively lend on lower risk assets, like industrial and multifamily. In these areas, borrowers can actually secure historically low interest rates. “There continues to be plenty of capital for all other asset classes bringing increased competition between lenders and historically low rates for borrowers,” says Blashaw. “Current coupon rates for larger, low-leverage multifamily loans are in the high 2% range with most other asset classes between 3.25% to 3.75%.”

Early in the pandemic, the CMBS market was perhaps the most impacted lending platform. However, that changed quickly and the market rebounded with competitive terms. “The CMBS market, which was dramatically affected by the Covid-19 pandemic, has returned with pricing that is reasonable compared to other competing capital sources,” says Blashaw. “Historically, CMBS spreads over T-bills hovered around 2%. For example, if the 10-year T-bill was at 2%, a 2% spread would create a coupon rate of 4%. With the current 10-year T-bill hovering around .60% to .70%, current CMBS all-in rates are in the 3.5% to 4.25% range providing spreads of 3% and above.”