For the first time since the financial crisis of 2008-2009, CMBS conduit issuance declined for the year. CMBS volume totaled $76 billion in 2016, down a whopping 25% from 2015’s $101 billion. Atypically, no single capital market disruption was a precursor to a decline. In 1999, volume declined when a hedge fund — Long Term Capital Management — failed and Russia defaulted on its debt. In 2002, volume declined after the events of 9/11. And, of course, the CMBS market completely seized up in 2008-2009 during the financial crisis. But since the restart of the CMBS market in 2010 (sometimes referred to CMBS 2.0), the market hummed along nicely until 2016.
So what happened? Well, a number of incremental events took a toll on the CMBS market in 2016. Problems started in the first quarter when the heavy volume of CMBS issuance overwhelmed demand that had weakened over concerns about heavily indebted oil patch companies and other concerns in the high-yield debt markets. Spreads on new issue CMBS widened quickly and dramatically in January and February as dealers struggled to sell all the CMBS bonds and profits were wiped out. Borrowers that had not yet closed in that period had their loans re-priced. CMBS conduit lenders pulled back from originating new CMBS conduit loans until the market for CMBS securities improved. Finally, spreads for AAA-rated CMBS peaked at 173 basis points (bp) over swaps on March 3 and began to rally.
CMBS volume improved over the summer, but CMBS loan originators began to focus on risk-retention rules that would become effective on December 24. Risk-retention requires CMBS lenders or issuers to “keep skin in the game” by retaining 5% of their offerings — typically for the life of a deal. Lenders were unsure how to best structure for risk-retention, which impacted the originations for smaller lenders that might not be able to comply.
Finally, interest rates rose on CMBS conduit loans post-election when the 10-year Treasury and Swap rates rose roughly 60 bp, and many borrowers went to the sidelines.
Summary of CMBS Issuance, 2009-2016
|Full Year||U.S. Issuance
Source: Commercial Mortgage Alert