New financial oversight regulations set to go into effect later this year will require lenders originating CMBS loans to retain a 5 percent segment of each CMBS deal for five years.
The new rules, going into effect Dec. 24, are raising concerns in a U.S. commercial real estate market – including Philly office space and Philly retail space – that continues to deal with a year-to-date 50 percent decline in overall issuance from last year. This issue is exacerbated by already tight spreads that linger from early 2016. So far this year, CMBS accounts for only 7 percent of the overall CRE lending market, down from 17 percent in 2015. At one point in 2006, CMBS accounted for nearly 50 percent of total CRE lending.
CMBS lenders suffered in the February 2016 rout of the global market – which also encompasses the U.S. and Philadelphia commercial real estate market – when prices declined and banks found that their recently originated loans earmarked for securitization were underwater. Oil-induced fears in high-yield debt markets forced hedge funds to unload positions, including subordinate CMBS debt, causing the price of securitized debt to plummet, Pacific Investment Management Co. (PIMCO) noted in a report this week.
This report on national and Philadelphia commercial properties was made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
The February fallout in CMBS also impacted the private commercial property transaction market as well as U.S. and Philadelphia commercial real estate properties. As CMBS lenders increased rates on their debt quotes by 50 to 100 basis points, return-minded property buyers responded by cutting their bidding prices, resulting in a sharp drop in transaction volume in the first quarter that has carried over through the first half of 2016.
Hardest hit were non-core markets, where CMBS represents over 35 percent of the non-multifamily debt origination volume, PIMCO said, as many deals fell out of contract or re-priced downward by as much as 15 percent.
While spreads have tightened and the market for national and Philadelphia commercial real estate listings has snapped back in recent weeks, CMBS lenders and analysts are now focusing their concerns on the new risk retention regulations.
The rules, adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, arrive as the U.S. commercial real estate market – including Philly office space and Philly retail space – is beginning to grapple with a total of $86 billion of CMBS loans scheduled to mature between the current quarter and the fourth quarter of this year, and another $123 billion in CMBS loans scheduled to mature in 2017.
Across all lender types, a total of $353 billion in debt is maturing in 2016, with an additional $395 billion maturing in 2017 and more than $300 billion coming due between 2018 and 2020. With the refinancing rate for both U.S. and Philadelphia commercial real estate listings expected to decline 50 percent by next year, Morgan Stanley expects to accelerate loan liquidations to over 10 percent by 2017 for 2006- and 2007-vintage loans even as lending conditions are tightening.
A combination of these factors is resulting in a 19 percent decline in the average size of a conduit deal that priced in the first five months of 2016 compared with last year, to the lowest levels since 2010. While fewer loans are being originated, the velocity of deals brought to market has surprisingly increased, resulting in more conservative underwriting standards for 2016 vintage deals as compared with 2015 and 2014.
For more information about Philly office space, Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) Leor Hemo (leor.hemo@wolfcre.com) or Lee Fein (lee.fein@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space and Philly retail space.
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