Securitized Loans Appear Back on Track

Article originally posted on CoStar on July 16, 2019

Securitized loan issuance, an indicator of the commercial real estate industry’s health, dipped in the second quarter from a year earlier. Even so, an examination of the data reveals plenty of bright spots.

Deals for all property types except single-family rentals were up from the first quarter of this year as the market rebounded from a slow start. And analysts are quick to say strong real estate fundamentals, along with still-low interest rates and the potential for rate decreases in the second half of the year, should keep loan volume steady and on pace with 2018.

Publicly offered commercial mortgage-backed securities deals totaled $9.8 billion in the second quarter, up 6% from the year-earlier period, according to CoStar. Private-label single-borrower deals, which are securitized mortgages that don’t conform to the criteria set by government-sponsored enterprises Freddie Mac, Fannie Mae and Ginnie Mae, totaled $12.4 billion, an increase of 1%.

The biggest boost came from collateralized loan obligation deals, which rose 9% to $4.7 billion. Such deals are generally made up of shorter-term, variable interest rate loans put together and managed by one lender. Such deals are popular with nonbank lenders.

The drag on securities issuances came from single-family rental-backed deals, and it was a substantial drag. Single-family rental volume was down 78% at a total of $720 million, down from $3.3 billion from a year earlier.

Single-family rental is a relatively new asset class with a handful of players. Issuance in the category is dependent on refinancing institutional investors’ portfolios and can vary widely quarter to quarter, according to bond rating agencies.

Outside of that category, securitized lending looks to remain stable at the current pace, analysts say.

“Although issuance slowed in June, it does not appear that the summer doldrums will spill over to CMBS issuance,” analysts at Kroll Bond Rating Agency noted in their most recent monthly note.

“We currently have visibility into a number of future transactions that will come to market, including up to seven conduits, more than a half-dozen single-borrower deals, three Freddie K-Series deals, and up to eight” commercial real estate collateralized loan obligation transactions, he said, adding that “at this juncture, it seems that many of the transactions will launch this summer.”

Morningstar Credit Ratings reported that the performance of commercial mortgage-backed securities will hold steady for the remainder of the year, given the low-interest-rate environment and the availability of cash in the market. The agency added it expects issuance will keep up with last year.

S&P Global Ratings also said it expects private-label U.S. CMBS issuance in 2019 to total $80 billion, on pace with last year.

“Issuance has picked up steam of late, and we believe lower long-term benchmark rates should generally support higher origination volume,” S&P analysts noted.