CWCapital Markets Update - Third Quarter 2017

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. Our feature includes an 11‐year CMBS conduit default study focusing on performance and pricing. We synthesize and present information gathered from various industry research, public resources, and our own research.

  • Economy: Positive employment statistics, continued slow growth
  • Cyclical highs and volatility in property prices
  • Feature: CMBS conduit default study – asset class performance and pricing


We recently reviewed over 56,000 loans securitized between 2004 and late 2016. Our goal to put current markets into context by identifying simple relationships and data points which may be useful in assessing risk.
Key Findings:

  • We observe an overall default rate of 18.4%, with the 2006 vintage reaching 28.9%
  • Overall severity rates at approximately 29.5%
  • Implied loss rates for all loans in the study average approximately 5.4%.
  • Suburban office, unanchored, and shadow anchored retail performed worst by a wide margin as measured by implied loss
  • Manufactured housing, student housing, and single tenant retail generally performed more favorably (also as measured by implied loss), however there is no assurance that that will continue.
  • Current 2016‐2017 vintage property valuations (median Appraisal / NOI multiple) are higher than in the worst performing vintages on a historical basis.
  • Low interest and cap rates contribute to premium pricing for similar or slow growth cashflows Although we do not expect a repeat of the financial crisis, higher yield pressures could present risk
  • Suburban office and unanchored retail median multiples appear rich given historical performance
  • Manufactured housing and hotel median multiples appear lowest with historical loss ranges at or below the average when compared to all loans
  • Pre‐crisis Mall properties have a default rate of almost 48% , while post‐crisis malls (60% of our population) have been lower. Our analysis combines both. With the changing retail landscape, we expect post‐crisis default rates to increase over time

For the complete commentary, stats and graphs:

The Economy

  • The September jobs report noted that on average, the economy has been creating 172,000 jobs per month over the past 12 months. Hurricanes Irma and Harvey contributed to a temporary decline in food and beverage service jobs along with related industries. As rebuilding begins, additional jobs are likely to be created.
  • The unemployment rate declined to 4.2%, the lowest level since 2006. The participation rate was steady at 62.9%. Interestingly, BLS notes that of major MSAs, Denver, CO has the lowest unemployment rate while Cleveland, OH has the highest. Overall, average hourly earnings rose by 2.9% year over year, continuing a positive trend.
  • The 10‐year US Treasury yield at 2.33% is recently off post election lows. We have seen a 2/10 flattening of 40bps YTD. In the past 30 days, 10‐yr yields have increased 30bp, but remain 10bp below 2016 year end level. Among the many factors that could influence interest rates in the near to medium term are the Federal Reserve’s expected “unwinding” of its quantitative easing balance sheet, increased global growth and recovery, and the prospect of deficit funded tax reform. The Federal Reserve Bank of Atlanta forecasts 2017 US GDP growth at a slow 2.5%.

Property Markets

  • Effective rent growth ‐ National average of 2.72% year over year, slowing from prior quarters. Multi‐family at 4.76%, retail at 1.40%, both lower than prior quarter growth.
  • Vacancy rates – For the trailing 1 year period, vacancy rates were generally stable, with industrial showing the only improvement. Multifamily deliveries remain high and we expect continuing vacancy increases in selected areas.
  • National property prices report declines and volatility in all sectors this year, although we remain near peak levels. Year over year results for the national retail sector has shown consistent declines every month this year.

Debt Capital Markets

  • Q317 CMBS conduit issuance of $12.6bn topped Q316 by some 7% as investors became more comfortable with risk retention requirements and the maturity wave. YTD2017 issuance of $32.9bn also 6% ahead of YTD2016’s $31.1bn.
  • CMBS risk retention pricing ‐ Horizontal subordinates in the 14% area, L‐shaped subordinates over 20% area.
  • Current conduit delinquency is reported at 3.44% according to Trepp, with some 80% of such loans concentrated in the 2006/2007 vintages. We see approximately 21% of currently maturing loans remaining in default after 90 days.

Trends to Watch

  • Cyclical highs in property prices ‐ national average hotel, retail, and office property prices experiencing volatility. Hotel risk premiums have widened out appreciably year to date. As property values increase, we see certain sponsors re‐levering and extracting equity. Multifamily valuations and construction a concern.
  • Impacts of Hurricanes – 2017 has seen two major hurricanes hit the continental US with the potential for performance disruptions as damage is assessed and repaired. Significant exposure including Agency Multifamily properties. Recoveries under business interruption, flood, and other property insurance policies will determine.
  • CMBS conduit market share – in our July 2016 update, we noted the decline in market share of conduit CMBS. Only 62% of maturing loan volume was being replenished to the sector. Q317 showed year over year growth for the first time in years. At $37.4bn, this years FHLMC CMBS issuance is 1.47x the volume of conduit CMBS, with Single Asset issuance gaining as well.

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