Equity, Debt & Stuctured Finance Capital Markets Update

Market Commentary

• Borrowing costs declined during the past month as recent CMBS issuances priced meaningfully tighter than those 30 days ago and Treasuries remained flat to slightly lower. CMBS issuances in mid-July priced AAAs and BBBs at S + 115-118 and S + 600, respectively, while issuances during the past two weeks have priced at S + 94-106 and S + 425-515, respectively. This has generally translated into all-in spreads from CMBS lenders that are 10-15 bps tighter than a month ago. The conduit that drew the most favorable pricing was a test deal for the new risk retention rules set to go into effect December 24th. Life insurance company spreads were generally unchanged during the past month as they continue to maintain interest rate floors in this low interest rate environment.
• MBA recently released their 2Q2016 Survey of Commercial/Multifamily Mortgage Bankers Originations. While YTD originations were flat, there was significant movement in originations by lender type. Banks increased originations by 38%, life insurance companies increased by 7%, agencies decreased by 12% and CMBS was down 29%. Banks continue to increase their share of commercial  real estate outstanding with 51.8% of commercial and multifamily loans as of 1Q2016, up from 48.2% in 2012 based on data from Federal Reserve. With increased scrutiny on the banking sector from financial regulators, there is concern that banks may not be able to maintain this pace of originations and continue to fill the void during periods of pullback from CMBS.
• Real Capital Analytics reported in their 2016 Midyear Review that US commercial real estate investment fell 16% in H1’16, but healthier trends underlie the headline figures. REITs were the furthest off of deal pace (-64%) in part as a result of REIT shares falling early in 2016 and new acquisitions not being accretive. Cross border activity was also down 47% but partially due to the decline in megadeals. Institutional managers and equity funds increased their investment activity by 11% year-over-year. This investor group did refocus their activities on core and stabilized assets and pulled back on value add transactions (+17% vs. -16%) and increased activity in the major metros and secondary markets (+10% and +19%) while pulling back on tertiary markets (-12%).

Download the full report