CWCapital Markets Update - September 2016

In This Issue

In this issue of the CWCapital Markets Update, we focus on the fundamentals and trends affecting national commercial real estate debt markets and take a brief look at the performance of FREMF KF transactions relative to CMBS conduits. We synthesize and present information gathered from various industry research, public resources, and our own research.


FREMF KF Floater Performance

In this report, we focus on the current performance of FREMF‐KF transactions issued in the past four years.

  • To date, we observe that no transaction is reporting a loss or delinquency, and only 1.21% of the collateral appears on the servicer’s watchlist. Cumulative interest shortfalls are less than $1,000
  • Performance compares favorably to a benchmark of traditional CMBS conduit transactions issued in the same period. These deals report $134mm (0.06%) in appraisal reductions, 0.28% of the loans delinquent, 6.22% on the watchlist, and $6mm in interest shortfall. This simple comparison helps to generally contrast performance between multifamily and other commercial collateral, and implicitly between agency and broad market lending standards.

For the complete commentary, stats and graphs:

The Economy

  • August saw 151,000 jobs added to the economy, below analyst estimates of 180,000. The unemployment rate remained at 4.9% and the participation rate remained steady at 62.8, still over 100bps below the 10‐year average.
  • The Bureau of Labor Statistics notes job growth in food service, social service, healthcare, and financial services. We see strength in multifamily and residential construction, with gains offset by continued losses in mining, oil and gas extraction (WTI remains low to mid $40/bbl), and in services in areas with declining demographic trends.
  • Although we have seen recent upticks in 10‐year US Treasury yields, trends of low (or negative) interest rates continue. August ended with a nominal UST10 yield at 1.58%, but the real 10yr rate was a mere 11bps. The last 12 months have seen an average UST10 real rate of 35bps with readings dipping into negative territory in July. (‐3bps). Global growth concerns could continue to restrain short term interest rate hikes.

Property Markets

  • Effective rent growth ‐ National average of 2.98% annual. Multi‐family leads at 4.25%, retail lags at 2.13%.
  • 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.
  • Although national property prices on a $/unit basis (year over year) generally report increases as of Q2‐16, we have seen four interim months of declines in hotel, retail, and office prices. We note that 3‐year growth rates have generally been decelerating for the past year in hotel and retail properties.

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 as of August lags 2015’s same period issuance by 38%.
  • Credit spreads on new issue long AAAs have now tightened by 54bp since the year began, with BBBs tightening by 100 amid significant volatility this year. AAA’s have varied by 80bp, while BBBs have varied by as much as 400bp.
  • Delinquency trends have been on the increase for four months now, and are at 4.68% according to Trepp. Maturity wave and conduit market contraction are driving the reversal of several years of declining delinquency.

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. Overall maturity defaults (later than 90 days past maturity) averaging approximately 8%, is not quite as bad as originally expected, but more to come.
  • Transformation of the lending base ‐ as conduit lenders and securitized markets withdraw, an opportunity for new balance sheet or long‐term lenders to enter the space. First “risk retention compliant” deal closed in August, but overall, the product continues to contract and lose market share.
  • Volatility in property prices ‐ national average hotel, retail, and office property prices have seen interim volatility. Multifamily valuations relative to highs, construction, and risk premium relative to benchmarks bear watching.

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