The Scotsman Guide - Victor Whitman - Aug 22, 2016 15:05 ET
For most of 2016, commercial mortgage-backed securities (CMBS) lending has been out of fashion.
The CMBS market share represented just 7 percent of commercial loan originations through May, down from 17 percent for all of 2015, according to Real Capital Analytics. Meanwhile, banks have increased their share of the commercial-loan market to 53 percent, which is up 18 percentage points from 2014.
“In truth, the CMBS market has always been in competition with the insurance company markets and the banks,” said Manus Clancy, senior managing director at Trepp.
“The [CMBS] conduit market share was steadily growing from 2010 through 2015, and in 2016 we’ve seen a stubbing of the toe, if you will, in terms of market share,” he told Scotsman Guide News.
In the Manhattan market, CMBS has lost a huge share of the new refinancing volume, according to a recent study by CrediFi.
CrediFi examined pools of newly refinanced CMBS loans with a total balance of $8.25 billion. These loans were backed by commercial properties in New York City, originated at least partially through conduit deals in the 2005-07 period, and were refinanced between 2015 and 2016. Of these refinances, just 19 percent were refinanced through CMBS channels, and 81 percent by other methods, mostly by portfolio lenders.
Of the loans that were refinanced outside CMBS channels, banks accounted for 87 percent of the financing of these loans, and life insurances companies accounted for 12 percent, CrediFi said.
Alex Veksler, CrediFi’s director of capital markets, said a few large insurance companies have swooped in to refinance deals backed by high-quality properties. For example, MetLife funded two loans in 2015 with a balance of $390 million that were backed by an office skyscraper at 1675 Broadway and a 13-story building at 253 Greenwich St. Metlife has more recently in 2016 refinanced two other loans backed by Manhattan properties with a balance of $470 million. Four other insurance companies financed a total of five additional loans with a balance of $715 million.
Veksler said the CMBS market has faced pricing volatility this year and uncertainty over new risk-retention rules that will become effective in December.
“At this point, I can’t really tell you what is going to happen,” Veksler said during a telephone interview. “The point is that CMBS is not the only source, and there is refinancing going on. It just might not always come from the regular sources.”
In the second quarter, lending for CMBS was down by 40 percent compared to the second quarter of 2015, according to the Mortgage Bankers Association. Overall lending by all investor types, however, was up 1 percent compared to a strong 2015 year, MBA reported.
CMBS volumes fell off primarily because the spreads demanded by investors widened early in the year, which ultimately made CMBS loan costs rise and made many deals unworkable, Clancy said. Since then, the spreads have come back down and conduit lenders have stepped up their lending again.
“Typically, it takes a bank two to three months to warehouse enough loans to securitize them,” Clancy said. “What we saw in the second and third quarter was a falloff in issuance because the issuers’ warehouses were dry. Since we have seen spread recovery and volatility erode, we have seen the issuers really try to ramp back up and capture more market share.”
Clancy said he expects CMBS volumes to tick back up, at least until the new risk-retention rules kick in and drive up the costs again for CMBS loans.