Through the first three quarters of 2017 CMBS conduit loan originations are up 5%, as measured by CMBS securities issuance. According to Commercial Mortgage Alert, CMBS conduit issuance as of September 30, 2017 totaled $33.8 billion compared with $32.2 billion a year earlier. However, overall CMBS loan origination volume is up a whopping 34% to $66.6 billion when large single-borrower loans are included. Based on this pace, combined CMBS loan originations are on track to easily exceed last year’s $76-billion total.
The strength in new CMBS originations stems from a variety of factors. CMBS issuers are now comfortable with risk-retention rules, having successfully sold CMBS using all three methods of risk retention — vertical, horizontal and L-shaped — without any method having much impact on bond prices. As a result, CMBS bond spreads have been stable, with senior AAA-rated CMBS market spreads holding steady below swaps plus 100 basis points (bp) for lower leverage deals and roughly swaps plus 100 bp for higher leverage deals.
With stable CMBS prices and relatively stable Swap and Treasury rates for most of 2017, borrowers have enjoyed interest rates on CMBS loans in the 4.5%-4.75% range for full-leverage loans and 4.25%-4.5% for low-leverage loans. It is anticipated that these levels of interest rates will remain available for the balance of 2017. Market professionals are forecasting slightly higher rates for 2018 as anticipated short-term rate increases proposed for 2018 by the Federal Reserve are expected to push CMBS conduit loan rates higher next year.