CMBS Volume Falls Short of Predictions, But Delinquencies Fall Faster
Commercial mortgage-backed securities (CMBS) issuance in the first quarter of 2014 shows a market easing off its record pace, but still on track for a very strong year. At the same time, delinquencies have fallen tremendously in the past year and particularly in the past few months, while some advisors are saying the strong investor yields of the past year may be behind us. With market indicators pointing in more than one direction, it will be interesting to see how CMBS volumes and yields play out over the next several months. What’s your prediction?
First-quarter CMBS issuance totaled just over $20 billion, down from nearly $23 billion in the first-quarter of 2013, according to Commercial Mortgage Alert. The pipeline for second-quarter issuance this year is about $15 billion, the same pace as 2013. Since last year was considered a banner year for CMBS, one might suppose that a similar pace in 2014 would be good news. But at the start of this year, the prognosticators were anticipating $100 billion in volume this year, building on 2013’s $86 billion which represented a 90 percent increase over 2012. Now, it doesn’t appear as likely we’ll cross the 12-digit issuance threshold this year.
Mortgage conduits attribute the lower-than-expected volume to increased competition for loans in the $3 million-to-$20 million range from community banks offering strong rates on five-to-seven year refinancing with recourse. One reason banks can afford to be more aggressive is that most delinquencies from the Great Recession have been worked out. This can be seen in the CMBS market as well.
Trepp reports that CMBS delinquencies fell 288 basis points in the 12 months ending in March, resulting in the lowest delinquency rate since January 2010. The rate has fallen fastest this year, from 7.25 percent in January to 6.54 percent in March. Loans more than 60 days delinquent fell 26 basis points in March to 6.28 percent. That’s good news for CMBS investors, but assuming a similar trend is occurring among institutional lenders, it could explain why banks are competing more successfully for loans again.
Understanding the CMBS landscape is also a matter of understanding yields. The asset class improved more than most other fixed-income alternatives in the last half of 2013, with some tranches seeing gains of 10 percent over six months. A perspective from PAAMCO in January suggested that CMBS prices approached fair value at the start of the year, ending a period where investors could make solid returns following a pure beta-trade, or price appreciation, strategy. Instead, investors will need to scrutinize deals more closely this year, so underwriters need to maintain standards even as they try to increase volume.
Does the slight pullback on deal flow represent a healthy trend for the CMBS market? Can originators sustain a high volume and still maintain disciplined underwriting in the face of greater competition? How low can the delinquency rate fall, and what’s the risk of the decline reversing itself in the next 12 months? Our comment section is open – I’d like to hear your thoughts on the direction of the market.