While 2016 brought choppiness to the CMBS market, rising interest rates and risk retention rules in 2017 may pose headwinds to the sector this year, sources say.
Issuance is expected to be up from last year, with multiple experts forecasting approximately $75 billion in 2017. The anticipated figure reflects an increase from 2016, which saw about $76 billion in issuance, but is down from 2015’s volume of over $95 billion.
It’s also nowhere near the peak of approximately $250 billion seen in 2006 and 2007, according to Keith J. Braddish, managing director at debt and equity provider NorthMarq Capital. The post-risk retention environment has made structuring CMBS deals more difficult, Braddish says.
Ratings firm Fitch also projects roughly $75 billion in new CMBS issuance this year, with risk retention likely to curb new deals for at least the early part of 2017, according to Zanda Lynn, U.S. CMBS business development head at Fitch.
Risk retention has seemed “somewhat like Y2K” to Gerard Sansosti, executive managing director with commercial real estate capital intermediary HFF, in that there was lots of talk, but little impact. “It does not feel like pricing has widened due to risk retention, but it’s difficult to say since the market widened out somewhat after the election and has not tightened much. Risk retention could have played a role. We should see the results of risk retention more clearly play out in the next six months.”
HFF forecasts $65 billion to $75 billion in CMBS volume in 2017, depending on “the number of large loans that are captured by CMBS shops.”
A number of smaller conduit shops closed down in 2016, says Sansosti. But this year, large CMBS shops appear to know what direction they are taking on risk retention securitization structures, be it horizontal, vertical or L-shaped. Worth noting is his assertion that risk retention has created more B buyers in the market than before.
Rising interest rates will be a concern for CMBS financiers watching their bottom line, Braddish adds, citing the post-election run-up in the 10-year Treasury as “a meaningful challenge to issuance.”
Approximately 30 percent of $47 billion in Fitch-rated CMBS loans maturing this year could default, says Mary MacNeil, managing director at Fitch. Fitch views maturing 10-year CMBS loans as facing “continued pressure.” The firm says expects “significant delinquencies” in those loans, citing high leverage levels.
About $112 billion in CMBS loans is scheduled to come due in 2017, according to research firm Trepp, with another $17.6 billion slated to mature in 2018. Office and retail loans account for the bulk of the balances, Trepp analysts say.
Fitch Ratings has projected the overall delinquency on CMBS to increase between 5.25 percent and 5.75 percent by year-end 2017.