MARKET UPDATE BLOG

CMBS Q3 State of the Union

November 13, 2013

Moody’s Investors Service recently issued its US CMBS Q3 Review, an in depth analysis concerning recent trends in the CMBS markets. The paper has received some noteworthy industry press and provides a good macro level perspective of the current status of the CMBS markets, as compared to the previous periods in the cycle. There were several salient highlights worth noting:

  • CMBS loan coupons have increased 90 bps in the aggregate since Q1 2013.
  • Cap rates seem to have largely absorbed the interest rate movement, with cap rates only having moved about 16 bps thus far.
  • The next 100 bps rise in rates is projected to increase cap rates by 50 bps.
  • Overall, Q3 has been likened to early 2006 vintage loans but holds to a later 2005 vintage because rates are still low and DSCRs are better than in 2006.
  • 43% of loans had some form of interest only, down 6% from Q2 to Q3. Moody’s expects IO to tick up in Q4 deals.
  • For comparison, in 2007, approximately 95% of CMBS loans originated had some IO component (with many being full term).
  • Meanwhile, in early 2010, only about 5% of loans originated contained some IO component, and most partial term.
  • In Q3 2013, lower LTV loans had more I/O, as one would naturally expect.
  • TI and LC reserves continue to tick down gradually.
  • Multifamily is ticking up as an overall asset class in CMBS securitizations, while hotels are leveling off. That trend should continue, helped by FHFA and government shut down (HUD).
  • Top 10 MSA’s as percentage of securitizations is ticking down to 34% in Q3 2013 from 44% in Q2 2013.
  • Moody’s also cited in increase in ground lease deals where ground rent exceeds 10% of EGI (in some cases close to 20%).
  • Unsurprisingly, credit and collateral quality is lessening as whole, as investors are forced to seek yields in assets that are credit challenged and/or located secondary and tertiary markets.

While this research is clearly limited in scope to only CMBS debt, and does not survey other sources of debt capital such as banks, life insurance companies, funds, it nonetheless helps to frame the current CMBS market dynamic quite succinctly.

Eliav Dan is the Executive Director of the origination team at Ladder Capital Finance LLC, a leading commercial real estate finance company focused on origination, credit, underwriting, structuring, capital markets and asset management.