March 11, 2016

Investors with property acquisitions in mind are finding financing a little harder and a little pricier to come by this year as banks and traders approach bonds backed by commercial real estate loans with caution.

Typically Commercial Mortgage Backed Securities (CMBS) loans are used across all aspects of the real estate market to finance riskier projects or properties that are so large that a single lender cannot fund an entire loan. Take, for example, a new mall in Texas or a state-of-the-art office complex in Minnesota: these are the types of multi-billion dollar projects affected, not the low leverage, core transactions in major markets for which all lender types are clamoring.

Recent stock market volatility has sent jitters through the sector which has led to widening spreads for CMBS. This is leading banks and traders to stay away from bonds that are not as liquid as they’d like.

As a result, the issuance of CMBS in the U.S. dropped to $3.3 billion in January – the lowest level since August 2012, according to Commercial Mortgage Alert.

“The CMBS market has been disrupted, and if you’re a borrower that needs to use the CMBS market, that’s a concern,” says JLL Capital Markets Managing Director Maggie Coleman.

While the real estate industry may be closely watching the situation, the bigger picture bodes well for investors seeking financing. “The rest of the market continues to be very liquid and there’s a lot of demand for real estate loans. Additionally, the CMBS market remains relatively healthy for very large, single borrower transactions compared to the multi-borrower conduit executions.”

Far-reaching effect

CMBS currently account for about a quarter of the U.S.’s commercial real estate loans, or $600 billion. That, combined with the fact that debt makes up about 75 percent of the typical overall funding of a project, means the price of CMBS has a wide-reaching effect.

Hotels and suburban office developers are among those now feeling the pinch along with smaller, non-gateway markets and properties categorized as lower quality assets (B and C class).

“With this kind of market volatility, debt gets more expensive, financing becomes a little harder and equity investors will adjust their pricing to reflect the more expensive debt costs,” says JLL Capital Markets Managing Director Keith Largay. “And the impact will be felt less in primary markets with trophy assets. It’s the secondary markets and lower quality assets where pricing will be impacted more significantly.”

Aiming for business as usual

Despite market volatility, deals are still being done. For instance, Benefit Street Partners closed more than $100 million worth of CMBS financing in Virginia, Florida and New Jersey in February alone.

“Recently deals have been choppy as CMBS has become less competitive compared to other sources of capital – spreads have widened by about one percent since late summer,” says Largay. “But that can’t be attributed to commercial real estate as the fundamentals in the market are still as strong as ever. Fluctuations have been driven by broader bond-market instability caused by slowing growth in China and a rapid drop in commodity prices, both of which caused junk bond prices to widen and then spread to pricing across the rest of the market.”

And while the real estate industry relying on CMBS may be on for a bit of a rocky ride in the short-term, the longer-term outlook is more promising. According to JLL’s U.S. Investment Outlook, CMBS issuance is still on the rise, and is forecasted to reach $110 billion by year-end. This is, nevertheless, well behind the previous cycle which peaked in 2007 with $210 billion.

“The good news is the CMBS market is far from dead, and the rest of the lending community remains as strong as ever,” says Largay. This may not be a record year for transaction volumes, but it will still be one of the high points of the current cycle.”

Originally published at

Maggie Coleman & Keith Largay
JLL's Americas Capital Markets team


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