The CMBS market appears to be looking up performance-wise, but there may be less of it in terms of outstandings, and despite stronger originations, according to a new report from Moody's Investors Service.
On a total amount outstanding basis, “the balance of CMBS is shrinking. In recent months there have been more loans paying off and resolved than originated,” said Tad Philipp, director of commercial real estate research at Moody's.
Nevertheless, Philipp said, “We're expecting healthy origination this year, with $25 billion or more of [nonagency] CMBS [issuance].” Moody's did not record any issuance in January, but he noted that there have since been some new deals.
Interestingly, he said, some of the issuance expected in the market this year “hearkens back to the RTC days” including CMBS used to finance “liquidating trusts” of nonperforming loans.
This was “widely done in the 1990s as part of cleaning up after the savings and loan crisis.” These structures were also used in Italy and Japan to help resolve financial crises in those countries.
“The first of the new generation” of these U.S. NPL deals are “in the pipeline” for March. These “one-off” deals will be done by opportunity funds that have acquired NPLs from banks at a discount.
However, the core type of issuance this year will be “conduit loans originated with the intent of securitization” by the dozen or so issuers that are currently active in that market.
In terms of where the market appears to be in terms of recovering from the most recent financial crisis, Philipp said, “the pig is about halfway through the python.”
Delinquent loans have been increasing, but more have been leaving the market through resolutions. According to Moody's, there were about $6.4 billion newly delinquent loans in January, which was the highest one-month flow of this type ever recorded by the company. But it was offset by $7.2 billion in resolutions. The total balance of delinquent CMBS loans has decreased during eight of the last 11 months, according to Moody's.
As noted recently in another article from the online version of ASR sister publication National Mortgage News, CMBS delinquencies (on both standard conduit deals and fusion deals that also include larger loans) have been trending toward a slow decline and relative stability, but there is some concern that could change when 10-year loans underwritten during the market's peak period of relatively loose underwriting reach 2016 and 2017. Also delinquencies are still above 9%. That being said, given some recent, positive indicators in areas like employment, Philipp said he sees “real estate fundamentals solidifying in time for the peak balloon years of 2016-2017.”
In addition to real estate fundamentals, as last year showed, the vagaries of the capital markets also will influence how CMBS fare this year, and so, too, will demand for financing, which is “a little low” at the moment, he said.
“There are not as many property sale transactions to drive financing [nor is there much] equity build up to cash out via a refinance. Neither one of those is firing on all cylinders at the moment,” said Philipp.