For 2017, CMBS professionals are projecting CMBS originations of $75 billion. Last year, the group’s average prediction of $110 billion proved to be too optimistic. The pros feel more uncertain about 2017 forecasts compared with other years. The culprit is risk-retention. CMBS issuers have successfully tested various deal structures that comply with the new risk-retention rules, but no particular structure stands out as best. The inability for the CMBS market to discover the best structure is causing some anxiety, particularly for smaller CMBS originators as certain structures might not work for them. As a result, they are originating loans at a slower pace until the best structure is proven.
In addition, should interest rates continue to increase or even remain at current levels, borrowers may be less inclined to purchase income-producing real estate using CMBS financing or refinance existing debt. This would put a damper on origination volume as well.
On the flip side, well over $150 billion of CMBS loans are slated to mature in 2017, representing the final wave of CMBS loan maturities from 2007 when $228 billion of CMBS loans were originated. It is expected that a significant amount of these loans will find their way back into CMBS, but so far the conversion rate of maturing CMBS loans into new CMBS loans has been disappointing. CMBS originators are finding that a good portion of the loans are sub-performing, requiring bridge financing in lieu of CMBS debt, and many low-leverage Class A property loans are going to insurance companies. Nevertheless, there will still be a large balance of loans in which a refinance back into CMBS will provide the best execution, particularly “B” quality assets that require non-recourse or cash-out.