Issuance of commercial mortgage-backed securities exceeded expectations in the first three quarters of 2017, surprising industry observers who believed new regulations could make borrowers and investment banks reluctant to bring new bond deals backed by commercial property to the market.
Some market observers worried at the start of the year that risk-retention rules instituted in late 2016 would slow issuance of new securitizations, hurting real estate owners' ability to refinance loans on their properties. Instead, investors have steadily purchased debt backed by commercial real estate throughout the year, pushing issuance near the level of its postcrisis peak in 2015.
The risk-retention rules require investment banks facilitating CMBS transactions to retain a portion of each offering, or sell it to a third-party investor, as a way of ensuring that issuers hold some accountability for the deals they design.
Joe McBride, a research associate at data and analytics firm Trepp LLC, said that in late 2016, early deals structured in compliance with the new rules priced more favorably than those without risk retention. Since then, CMBS issuance has rebounded compared to what was, in hindsight, a lackluster 2016.
"I think investors see this risk retention as an actual incentive for the issuers to do a good job on their underwriting and write good loans," he said.
Total non-agency CMBS issuance so far in 2017 totals $63.06 billion, compared to $70.65 billion for all of 2016, and $97.43 million in 2015, according to Trepp data. McBride said he expects total issuance to fall short of $100 billion, but to significantly outpace the 2016 volume.
Robert Grenda, an analyst at Morningstar Credit Ratings LLC, said the relatively stable economy, marked by steady GDP growth and low unemployment, has bolstered property values and contributed to the active CMBS market.
Rise in single-asset deals
Securitizations backed by single commercial properties have been especially hot in 2017, with the volume of such transactions — including a refinancing of the Manhattan, N.Y., office tower at 280 Park Ave. — already surpassing the 2016 full-year total.
The popularity of single-asset deals continues a trend that began in the years following the last financial crisis, in which investors shied away from bonds backed by more complex portfolios.
Before the recession, when total CMBS issuance surpassed $150 billion in 2005 and 2006 and $200 billion in 2007, bond transactions often included hundreds of loans. Loans backed by more valuable properties often were split up among multiple securitizations, McBride said. As the CMBS market has cautiously recovered, he added, investors have favored simpler deals, backed by fewer, stronger properties in primary markets.
In many cases, large loans that were spread out across multiple conduit securitizations before the crisis are being replaced by single-asset transactions, McBride said.
At 280 Park, the $1.075 billion CMBS loan and a $125 million mezzanine financing are replacing a $900 million balance sheet loan that the property's owners, SL Green Realty Corp. and Vornado Realty Trust, took out from Deutsche Bank and Bank of China in 2016. That loan, in turn, replaced $721 million in debt, some of which was spread across multiple 2006 CMBS deals.
The owners' cost of debt at the property — a 43-story office tower near Grand Central Terminal that is headquarters to PJT Partners, Cohen & Steers and other financial firms — has fallen substantially since the earlier CMBS transactions. The $721 million of debt from 2006 carried an interest rate of roughly 6.35%, while the 2016 loan came with a floating interest rate of the London Interbank Offered Rate plus 2.00%, according to the property owners. According to a presale report from Fitch Ratings, the coupon on the new CMBS loan is one-month LIBOR plus roughly 148 basis points.
Despite a period from roughly 2011 through 2014 when the building suffered low occupancy and struggled at times to generate enough rent to cover the owners' debt, the appraised value of the building has risen well beyond its 2006 valuation — in part because the property owners undertook an extensive renovation.
An Aug. 1 appraisal put the 56-year-old property's value at $1.85 billion, compared to a 2006 appraisal that valued it at $1.27 billion, according to Trepp.