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HFF Research Update for July 10, 2015: CMBS Digest

Friday, July 10, 2015

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

Approximately $27.5 billion of CMBS paper was securitized in the United States last quarter, the second-largest total in a quarter since 2007. Bringing the YTD total to $54.5 billion, CMBS volume is up 33 percent over the same time period in 2014. I would wager this percentage growth will prove exactly par with transaction volumes when Real Capital Analytics prints 2Q figures later this month.

Analysis of Market Insights and Economic Performance

Assuming the second half of the year experiences slightly higher origination volumes, which is typical, the CMBS market is on pace to originate $125 billion in 2015 according to Commercial Mortgage Alert. This would be just under 50 percent of the 2007 total of $228.5 billion (about half of total transaction volume in that year).

Deutsche Bank continues to hold the top originator crown, having securitized 19.2 percent of the market YTD ahead of Wells Fargo’s 16.8 percent and JPMorgan’s 11.2 percent.

With six good months behind us investors are more interested in the view of the next two quarters. Headwinds facing CMBS underwriters include regulatory and rating-house scrutiny, deepening B-piece buyer analysis, widening corporate bond yields and uncertainty around the timing of an FOMC rate hike. This is all very healthy, but it has more than doubled the time CMBS lenders are holding closed loans on balance sheet prior to successful securitization, again according to Commercial Mortgage Alert, from 31 days in the first half of 2014 to more than 75 days currently. This is giving rise to the tendency of smaller originators to pair up with larger bookrunners, contributing their own loans into the partner’s pool.

While we cannot say the extent to which longer hold periods pressure credit spreads higher, we can say that it doesn’t help – particularly when layered onto the headwinds I mention above.

Still, a survey of CMBS market participants expects bond prices to bounce back, and therefore spreads to narrow, over the next six months. Spreads on long-term, super-senior bonds could narrow by 11 basis points in the next six months according to CMA’s survey, bringing those spreads back below 100 basis points. Spreads on lower-rated tranches are also expected to decline and to do so by larger amounts through the end of the year.

Spreads better be coming in, because we are seeing benchmark yields gap out. The yield on the 10-year SWAP is up ~6 bps this morning alongside the 10-year UST. Meanwhile, 10-year corporate bond yields are up about double amount that across the ratings spectrum. We have stated several times over the course of the past few weeks that sovereign yields have been compressed due to uncertainty in Greece, and more recently China. As volatility subsides, so too do (surety) bond prices driving yields higher.

We certainly are not out of the woods yet. Greece’s new bailout request more closely mirrors terms conceived by the EU, but Greek citizens still have to pass whatever is ultimately agreed. And though China’s bourses rose higher Friday, they still face artificial stop-loss measures and almost $300 billion of margin debt still outstanding.

Maybe try watching the BBC this weekend for the latest news overseas. Hopefully by this time Monday we will have seen the EU adopt a new bailout for Greece, short-term-minded as that strategy may be.

About Jimmy Hinton

Mr. Hinton serves as Managing Director of HFF, responsible for the firm’s research efforts. Mr. Hinton works with the HFF Jimmy Hintonexecutive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

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