Member News

CMBS Market Wakes Up After a Month-Long Nap

CMBS market has come back to life after a month-long hiatus. Two single-borrower transactions and a conduit deal have priced, while four other deals wait in the wings. The seven deals total $5.9 billion, amounting to 15% of the $41.5 billion in CMBS deals to hit the market in 2016.

Recent pricings include a single-borrower deal backed by a $900 million piece of a $1.2 billion loan against a 1.7 million-square-foot office building at 9 West 57th Street in Midtown Manhattan. There is another deal backed by a $235 million piece of a $275 million financing package against a portfolio of extended-stay hotels owned by Woodsprings Hotels of Wichita, Kansas. Both deals were led by JPMorgan Securities.

The aforementioned conduit deal, Wells Fargo Commercial Mortgage Trust, 2016-LC24, priced yesterday at spreads that were markedly wider than those of the last few conduits. Benchmark bonds priced at 108 basis points more than swaps, which was three basis points wider than Morgan Stanley Capital I Trust, 2016-UBS11. The deal’s BBB- bonds priced at a spread of 625 basis points, up from 485 basis points for the UBS11 deal.

You would think that the first deal prior to a four-week drought would have investors chomping at the bit. And it may have, if not for overall choppy conditions in the broader fixed-income markets driven by investors’ growing concerned about inflation. The yield from the 10-year Treasury widened to 1.7% yesterday from 1.51% in mid-August. Meanwhile, CMBS spreads have widened across the board, so the yields investors are receiving have increased handsomely. Three deals on the starting blocks also caused concern for the LC24 deal.

As far as underwritten metrics are concerned, the collateral pool for each of those deals is among the most conservatively written this year. They have an average loan-to-value ratio of 56.27%, debt-service coverage ratio of 2.38x and debt yield of 11.6%.

Compare that to the 32 conduits that preceded the LC24 deal: 60.7% LTV, 1.89x DSCR and 11.17% debt yield, respectively.

But in order to achieve conservative metrics, the lenders that contributed loans to the transactions were required to provide lower coupons. For instance, the weighted average coupon for GS Mortgage Securities Corp., 2016-GS3 is only 4.0217%. We would need further confirmation, but that could be the lowest WAC for a conduit ever. The closest to that rate was the 4.054% WAC on Morgan Stanley Capital I Trust, 2015-MS1, which priced in June 2015. Its benchmark bond class priced at a spread of 93 basis points more than swaps, about 15 basis points tighter than what the market might dictate today.

The largest loan in the GS3 deal is an $87.5 million piece of a $900 million mortgage against 10 Hudson Yards, a 1.8 million-square-foot office property in Manhattan that is owned by the Related Cos. and Oxford Properties Group. It has a coupon of 2.983%. The deal’s second-largest loan is a $75 million piece of a $400 million financing package against 540 West Madison, a 1.1 million-square-foot office property in Chicago, which pays a 3.23% coupon.

Issuance is expected to remain healthy for at least another month or so as banks clear their books of recently originated loans. Here’s to hoping the market’s appetite is as fervent as football fans’ appetite for Buffalo wings and touchdowns on Sundays.

Compliments of Trepp – a member of the EACCNY