Recent spread widening and market volatility are taking their toll on new CMBS loan originations. Transactions totaling only $3.1 billion are in the pipeline for the fourth quarter, down from an average of $8.6 billion in the first two quarters of 2011, according to Commercial Mortgage Alert.
As previously reported, CMBS spreads have blown out in recent weeks, raising the cost of capital for lenders and forcing them to become more cautious. Securitization programs have widened loan spreads significantly, making them less competitive against portfolio lenders. Many shops have effectively halted originations until the volatility subsides. Wider spreads were sparked by economic woes unconnected to the commercial real estate market — the downgrade of U.S. Treasury bonds, poor economic data and an uncertain debt picture in Europe. The economic turmoil has rattled the CMBS market.
“It’s one step forward, two steps back as the CMBS industry fights its way to normalcy,” lamented Michael D. Sneden, Executive Vice President at ValueXpress. “We were just gaining traction with a steady flow of executed CMBS conduit loan applications that have now slowed considerably as conduit lenders take stock of the economic risks relative to the current levels of profitability from CMBS securitizations.”
From the restart of CMBS securitization in 2010 through May 2011, CMBS spreads on AAA-rated senior bonds marched downward from 165 basis points (bp) over swaps in June 2010 to 110 bp over swaps in May 2011, providing excellent returns for securitization shops and market enthusiasm, allowing CMBS loan originators to consider higher LTVs and deals with just a little hair on them. “Now the deals have to be pretty clean to get a quote,” said Sneden. “However, I am optimistic the spread widening will reverse itself over time and the recovery in CMBS originations can resume later this fall.”