Industry pros expect a stable CMBS market in 2017, with CMBS origination volume of $60-$70 billion. While stable markets are always welcome, volume of $60-$70 billion was viewed as somewhat disappointing. CMBS conduit loan originations post-crisis peaked at $101 billion in 2015 and have been on the decline since, posting $76 billion of loans in 2016 and projected to decline further in 2017.
A panel of industry veterans debated the direction of CMBS conduit loan originations during a breakout session called “CMBS: The New Normal.” The panel was moderated by Chris LaBianca, Managing Director and Head of Origination for UBS Real Estate Finance. Chris set the tone by noting that the market share for CMBS conduit loans has fallen from 40% of all commercial real estate loans to under 20%. Chris asked the panelists — Steven Schwartz from Torchlight Investors, Dennis Bernard from Bernard Financial Group and Joseph Geoghan from JPMorgan — about what’s going on. Below are the takeaways:
- The top 15 CMBS conduit loan originators are closing 85% of all CMBS conduit loans; risk-retention is negatively impacting originators who do not have a risk-retention strategy, mainly the smaller firms closing the 15% balance. Most of these firms are expected to exit the market.
- The b-piece buyers have contributed to the decline in CMBS volume by increasing the amount of “kick-out” loans, effectively reducing the amount of loans in CMBS secured by “B” quality properties and properties located in tertiary markets. B-buyers recognize they need to be more flexible or risk not having enough b-pieces to buy if volume falls further.
- At this juncture, the “vertical” risk-retention structure is achieving the best prices in the CMBS market, although JPMorgan is convinced the “horizontal” risk-retention structure will be most efficient over the long run.
“We have aligned ourselves with “vertical” risk-retention partners right now as they are offering the lowest loan spreads for our clients,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “For example, we just issued a Term Sheet on a $7-million hotel deal with a “vertical” partner in which the loan spread was 25 basis points inside all the other bidders.”