Real estate owners have had a rocky love affair with cheap debt.
Commercial real estate’s fixation with low interest rates has dragged it to China to court EB-5 investors and to Israel’s nascent bond market. But in recent years, real estate’s most steady source of it has been an old flame: commercial mortgage-backed securities.
Even after a global pandemic left parts of the office market reeling and retail in the pits, property owners are increasingly turning to CMBS to get deals done.
Private-label, or non-government backed, CMBS issuance rose to over $100 billion for the first nine months of this year, putting it on pace to surpass 2019’s record of $115 billion, according to a recent report by Trepp.
This time the source of CMBS debt is different. Borrowers are flocking to single-asset, single-borrower deals — SASB loans are for portfolios or trophy properties — instead of conduit CMBS loans, in which multiple loans are tied to multiple assets and sold to investors.
In the third quarter, SASB deals made up close to 40 percent of CMBS transactions, which totaled $36 billion. SASB deals are generally larger deals for marquee properties such as SL Green Realty’s $3 billion refinancing of the One Vanderbilt office tower in Manhattan.
Out of all CMBS private label issuance in the quarter, only seven were conduit deals, totaling just $7.8 billion, according to Trepp. This year, conduit deals have made up $22.6 billion or 22 percent of total private-label CMBS issuance. That’s down sharply from 2017 to 2020, when conduit deals averaged 46 percent of the market.
While conduit deals have slowed, commercial real estate collateralized loan obligations, or CLOs, are on the upswing.
Compared to CMBS conduit loans with 10-year terms, CRE CLOs are often riskier mortgages, such as bridge or transitional loans, with a term of two to three years and options for one- to two-year extensions. CRE CLOs today are a revamped version of the collateralized debt obligations that became notorious for their role in the 2008 Financial Crisis.
In the third quarter, CRE CLOs consisted of 13 transactions and $12.6 billion in loans, Trepp reported. Multifamily deals accounted for over 68 percent of that money.
The decline in conduits has widespread implications for the market — mainly, that fewer fixed-rate bonds are available in the private CMBS market. Only 29 percent of CMBS and CRE CLO issuance in 2021 was fixed-rate, down from more than half of the market previously.
Trepp’s data also highlights the type of deals getting financed. SASB deals saw retail securitizations grow to 17 percent in the third quarter from 6 percent in the first half of the year.
The largest third-quarter SASB transaction sent $3.2 billion to Blackstone entities to finance data centers.
The CMBS market exploded in 2007 as U.S. property values rose to all-time highs, but came to a near halt in the financial meltdown that followed.
Lenders, borrowers and investors eventually returned to the space as property values recovered. Borrowers were drawn to the CMBS market because the loans offered lower rates and were often easier to obtain than traditional bank financing.