CMBS News Updates: Spring 2019
In the first quarter of 2019, a variety of trends and events have impacted the state of CMBS and conduit financing in the United States. Looking back at the 2018 year, while overall commercial loan transaction volume was up, CMBS issuances fell approximately 12%, to just under $77 billion. Overall, CMBS delinquency rates rose slightly, and, experts believe that troubled retail properties, including shopping malls, may be in for additional trouble if they cannot find a lender willing to refinance their debt.
CMBS and Conduit Loan News
In the first quarter of 2019, a variety of trends and events have impacted the state of CMBS and conduit financing in the United States. Looking back at the 2018 year, while overall commercial loan transaction volume was up, CMBS issuances fell approximately 12%, to just under $77 billion. Overall, CMBS delinquency rates rose slightly, and, experts believe that troubled retail properties, including shopping malls, may be in for additional trouble if they cannot find a lender willing to refinance their debt.
Study Shows Difference Between Bank and Non-Bank CMBS Delinquencies
A recent study indicated that non-bank CMBS lenders faced borrower delinquencies at nearly twice the rate than bank CMBS lenders. This may be the result of a variety of factors, but can most likely be attributed to more lenient underwriting by non-bank lenders. In particular, CMBS loans originated in 2016 and 2017 generally had higher LTVs and lower DSCRs than their counterparts in earlier years. The most common reason for default was building occupancy issues, however, borrower-related issues also played a role in a significant amount of delinquencies.
Large CMBS Deals Still Impact The Market in 2019
While there aren’t many $1 billion+ CMBS deals to report in recent months, there are still several large transactions worthy of note. The largest CMBS deal in Q1 2019 was a $1.17 billion SASB transaction involving a group of medical offices in Cambridge, Massachusetts. Another large single-borrower deal involved Retail Value Inc., which refinanced 25 shopping centers with a $900 million CMBS loan.
Other noteworthy deals include a 48-story office tower in San Francisco that was refinanced with a $755 million CMBS loan in March. Plus, in April, a large group of investors financed the majority of the $398 million purchase of the Hyatt Regency New Orleans with a sizable conduit loan.
Related Questions
What are the latest CMBS loan trends for Spring 2019?
The latest CMBS loan trends for Spring 2019 include a decrease in overall CMBS issuances, with total global CMBS volume down from $88.9 billion in 2017 to $82.9 billion in 2018. CMBS volume is expected to stay static in 2019, though some analysts believe that it may fall slightly. First quarter 2019 CMBS issuances are down 15% from the same time last year. The largest CMBS deal in Q1 2019 was a $1.17 billion SASB transaction involving a group of medical offices in Cambridge, Massachusetts. Other large single-borrower deals include Retail Value Inc., which refinanced 25 shopping centers with a $900 million CMBS loan, and a 48-story office tower in San Francisco that was refinanced with a $755 million CMBS loan in March.
What are the advantages of CMBS loans for commercial real estate investors?
CMBS loans offer commercial real estate investors a number of advantages, including:
- Flexible underwriting guidelines
- Fixed-rate financing
- Fully assumable
- Lenders and bondholders can potentially achieve a higher yield on investments
- Investors can choose which tranche to purchase, allowing them to work within their own risk profiles
For more information on the pros and cons of CMBS loans, please see this article and this article.
What are the risks associated with CMBS loans?
The major downside of CMBS loans is the difficulty of getting out the loan early. Most, if not all CMBS loans have prepayment penalties, and while some permit yield maintenance (paying a percentage based fee to exit the loan), other CMBS loans require defeasance, which involves a borrower purchasing bonds in order to both repay their loan and provide the lender/investors with a suitable source of income to replace it. Defeasance can get expensive, especially if the lender/investors require that the borrower replace their loan with U.S. Treasury bonds, instead of less expensive agency bonds, like those from Fannie Mae or Freddie Mac.
In addition, CMBS loans typically do not permit secondary/supplemental financing, as this is seen to increase the risk for CMBS investors. Finally, it should be noted that most CMBS loans require borrowers to have reserves, including replacement reserves, and money set aside for insurance, taxes, and other essential purposes. However, this is not necessarily a con, since many other commercial real estate loans require similar impounds/escrows.
What are the best strategies for obtaining a CMBS loan?
The best strategies for obtaining a CMBS loan are to ensure that the property is well-maintained and has a strong financial history, as the property itself is the most important factor in the loan approval process. Additionally, borrowers should be aware of the flexible underwriting guidelines, fixed-rate financing, and fully assumable nature of CMBS loans. Lastly, borrowers should be aware that CMBS loans may be harder to come by in smaller markets.
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What are the most important factors to consider when applying for a CMBS loan?
When applying for a CMBS loan, the most important factors to consider are the loan-to-value (LTV) ratio, debt service coverage ratio (DSCR), debt yield, net worth, and liquidity. LTV is the ratio of the loan amount to the value of the property, and DSCR is the ratio of the net operating income to the debt service. Debt yield is determined by taking the net operating income of a property and dividing it by the total loan amount. Borrowers typically need to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount. Source