Slower issuance of conduit commercial mortgage-backed securities pulled down overall volume in early months of 2019, continuing a trend from the prior year.
The good news for CMBS book runners and investors is that other types of real estate bond deals — including single-asset and single-borrower transactions; commercial real estate collateralized loan obligations, or CRE CLOs; and agency securitizations — have surged into the void in recent years to keep transaction volume mostly steady.
Issuance of conduit CMBS deals, in which investment banks bundle and securitize pools of relatively small loans originated by their affiliate lenders, totaled $8.59 billion through April 22, compared to $11.25 billion for the comparable period in 2018, according to J.P. Morgan data. Single-asset and single-borrower CMBS deals — securitizations structured around one asset or
Observers say the lag in traditional conduit CMBS issuance stems from several factors, including a relative dearth of 10-year-old loans to refinance from the period after the global financial crisis; Fannie Mae and Freddie Mac's launch of structured finance platforms securitizing multifamily loans in the postcrisis era; and the emergence of private debt funds and mortgage REITs to claim significant lending market share.
CRE CLOs, backed by pools of transitional loans largely originated by those alternative lenders, have picked up some of the slack from traditional CMBS in 2019, as volume increased to $5.02 billion year-to-date through April 22
With the CRE CLO market on pace for another busy year, some market participants say the rise of alternative structured debt products — which have taken some lending volume from traditional CMBS and some from balance-sheet lenders such as banks and insurance companies — soothes the sting of the conduit slowdown.
"There's plenty out there," Edward Shugrue III, a portfolio manager at RiverPark Funds, a debt investor, said in an interview. "Volume is off a little bit year over year ... but I think the bigger trend is that the underlying types of securities are changing away from traditional conduit."
Emergence of new lenders
Conduit CMBS was the dominant type of commercial real estate securitization in the last real estate cycle: In 2007, the busiest year ever for CMBS, conduit issuance totaled $188.47 billion, representing nearly 81% of the total volume of CMBS, CRE CLOs and agency securitizations.
In recent years, though, a range of choices have emerged for bond investors. Issuance of Freddie Mac's "K deals" — mortgage-backed securities backed by multifamily loans — rose steadily from the program's inception in the late 2000s to an annual high of $61.64 billion in 2018.
By taking over much of the multifamily lending market, the government-sponsored enterprises
Conduit volume has also faced pressure from single-asset/single-borrower CMBS deals, which jumped from $19.37 billion in 2016 to $35.39 billion in 2018. Though single-asset/single-borrower deal volume was also down in early 2019, Shugrue predicted the market will remain active because high-profile asset managers are continuing to tap the CMBS market for capital to execute large property purchases, in the types of transactions that tend to produce single-borrower deals.
Recent single-borrower CMBS deals, both in March, include a transaction backed by a $530.0 million loan on cold storage properties owned by Blackstone Group LP affiliates, and a $402.8 million transaction in which a Brookfield Property Partners LP affiliate financed seven office and mixed-use properties acquired in its purchase of Forest City Realty Trust.
Market participants say the relatively small size of loans in conduit CMBS has allowed other borrowers, including small banks, to take some market share away from conduit lenders. By contrast, the relatively large loans in single-asset/single-borrower deals are too big for many lenders to originate, leaving CMBS lenders relatively secure in that space, observers said.
Investor demand has also been a factor in the shift away from conduit deals. Many single-asset/single-borrower deals — like most loans in CRE CLOs — are floating-rate, which has made them attractive to investors in recent years' rising-rate environment. And CRE CLOs, which are typically made up of shorter-term loans on riskier properties than those in traditional CMBS, offer investors higher yields in absolute terms.
In an April CRE CLO deal, Prime Finance Partners financed a portfolio of 35 floating-rate loans totaling $764.2 million.
Shifts among types of real estate securitizations matter both to lenders and to investment banks, which earn fees for underwriting debt offerings.
Emphasis on one type of securitization or another varies between firms: According to Commercial Mortgage Alert, the top three U.S. CMBS book runners in 2018, by deal volume, were JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. The category included both conduit and single-asset/single-borrower deals.
Wells Fargo & Co. led CRE CLO book runners for the year, followed by J.P. Morgan and Goldman Sachs. The top agency CMBS book runners for the year were Credit Suisse Group AG, J.P. Morgan and Wells Fargo.
Slow start to year
There are signs that the CMBS market could pick up as the year progresses: As of April 24, co-lead managers and joint book runners Wells Fargo, Barclays Capital Inc. and UBS Securities LLC were marketing a conduit deal backed by 64 loans on 346 properties.
Jen Ripper, an investment specialist at Penn Mutual Asset Management, said consistent investor demand for commercial real estate securitizations helped issuance maintain momentum after a dry period in December 2018 and January 2019.
Capital market volatility in December slowed the process of loan origination and dampened investor demand for bond offerings that did come to market, Ripper said. Then in January, a major conference held by the Commercial Real Estate Finance Council was later than in past years, so issuers' traditional quiet period before that event lasted longer, she said.
Ripper expects total issuance, including conduit and single-asset/single-borrower deals, plus CRE CLOs, to finish 2019 roughly flat, especially considering the market's revival midway through the first quarter. Still, she said there are some warning signs in commercial real estate, with rent growth in many property types generally expected to decelerate in the remainder of the year.
"I think that fundamentals are holding the line here," she said. "But where we've been in this expansion cycle, there is reason to be cautious."