The CMBS market suffered a setback last week when bond spreads widened sharply again. According to Commercial Mortgage Alert, the spread on the benchmark triple-A class of an offering led by Wells Fargo and RBS priced on Thursday, July 21 at 170 basis points (bp) over swaps. That was 35 bp wider than initial price talk and 40 bp wider than the comparable class of the previous CMBS transaction.
The sharp drop in bond prices further complicates the outlook for CMBS lending. After standing at 105 bp over swaps in early June, triple-A spreads have now widened 65 bp. CMBS shops are going back to borrowers under application and repricing those deals to reflect the new economics as well as resetting internal loan pricing for new applications.
“The spread widening is a big disappointment at this stage of recovery in CMBS lending. The CMBS market is struggling to get footing and the spread tightening on the triple-A class through June was really helping the market,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Now the reverse is occurring; a few shops have stopped lending and the remainder are worried about the economics of the business.”
Since the benchmark triple-A class represents approximately 85% of a CMBS issue, there is nearly a 1:1 relationship between the increase in the spread widening from 140 bp a few weeks ago and the current 170 bp level. “Our borrowers have been repriced by about 30 bp this week, after a 40 bp jump a few weeks ago when the spread on the benchmark triple-A class moved from 105 bp to 140 bp,” said Sneden. “Luckily, we are able to explain the market changes to our borrowers in a way they can understand and no one withdrew their applications. But if spreads do not reverse, it will likely create a slowdown in new applications.”
