In This Issue
In this issue of the Capital Markets update, we focus on the fundamentals and trends affecting national commercial real estate debt markets and a brief glimpse into the size and share of the CMBS conduit market. We synthesize and present information gathered from various industry research, public information resources, and our own research.
CMBS Market Share – Giving up ground
In this report, our focus is on shifting lending patterns in the CRE market. While many analysts discuss net issuance as a measure of strength in the CMBS market, we believe a deeper analysis can provide valuable insights.
- The CMBS conduit as a CRE financing vehicle appears to be giving up ground. The Agencies and Agency transactions have dominated multifamily lending since the financial crisis, alternative structures such as single asset / single borrower deals have emerged, and balance sheet / alternative lenders have all increased market share. Additional headwinds in the form of risk retention and Basel III capital requirements may create significant opportunities for alternative lenders up and down the capital stack.
- We calculate and evaluate a simple multiple of conduit issuance versus collateral supply to determine if the conduit market is maintaining its share of existing loans, drawing loans from alternative financing sources, or if it is giving up opportunities to those sources…
For the complete commentary, stats and graphs:
- June saw 287,000 jobs added to the economy, a very strong report given analyst estimates and recent weakness. The unemployment rate rose to 4.9% as the participation rate increased by .1% to 62.7, close to its two year high, but it still 100bps below the 10‐year average.
- The Bureau of Labor Statistics notes job growth in leisure and hospitality, healthcare, and financial activities. We also see strength in multifamily and residential construction, and now seasonal tourism, with some gains offset by oil and gas extraction and in services in areas with declining demographic trends.
- Macro trends of low (or negative) interest rates continue with the 10 year US Treasury near 1.35%, setting an all time low. Flight to quality following the Brexit vote and new concerns about global growth prospects resurface. Implied inflation slowed to 1.40% as it continues its long‐term decline. WTI crude declined slightly to the mid $40s/bbl range.
- Effective rent growth ‐ National average of 2.25% experienced across all property sectors with multi‐family leading at 3.13% and retail lagging at 1.67%.
- Vacancy rates ‐ Multifamily saw an increase of 10bps to 4.50% relative to year end. This is the highest reading in three years. The trend bears watching as robust construction and deliveries continue.
- National property price levels on a $/unit basis report increases thus far in Q2‐16 across all categories. While interim data can be volatile, we note that 3‐year multifamily price growth rates have generally been decelerating for the past year. Earlier this year, Moody’s / RCA reported their first price declines in six years, but July’s report shows some firming.
Debt Capital Markets
- Conduit originations and issuance have slowed significantly this year as market volatility, liquidity, and risk retention all begin to apply. Current year issuance for the first half lags 2015’s same period issuance by over 37%.
- Credit spreads on new issue long AAAs have now tightened by 15bp since 12/31, while BBBs are still some 160bp wide. Spread volatility early in 2016 has led some lenders to widen average loan coupons by 15 to 40bp this year. AAA’s have varied by 45bp, while BBBs have varied by 325bp.
- Delinquency trends are now increasing with a 5.52% rate according to published research from Citibank. Maturity wave and conduit market contraction as primary drivers.
Trends to Watch
- Maturity wave and risk retention ‐ potential for increased loan defaults as liquidity recedes from securitized markets due to risk retention, bank capital rules, and regulatory requirements. Evidence of this dynamic is present in current markets.
- Transformation of the lending base ‐ as conduit lenders and securitized markets withdraw, could be an opportunity for new balance sheet or long‐term lenders to enter the space. This trend is the focus of this month’s report.
- Early signs of volatility in property markets given concerns about long term economic growth and overall debt markets.
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