The Year-End 2018: Will the End of Cheap Money Reel in CRE?
January 17, 2019 | Orest Mandzy | Trepp
Domestic, private-label CMBS issuance last year totaled $76.1 billion in 2018, down roughly 12% from 2017's volume. That could be viewed as a disappointment, but it shouldn't have been a surprise. Consider that CMBS issuance in 2008 totaled only $12.1 billion and overall commercial mortgage lending volume that year declined by 62% from the previous year. This is crucial because 10-year loans issued in 2008 would have come due in 2018 and provided much of the lending opportunities last year. Given those numbers, it's a surprise that CMBS issuance wasn't lower.
While private-label issuance was down, the collateralized loan obligation market took off. A total of $14.2 billion of deals priced last year, nearly doubling the prior year's volume. When you add that to private-label CMBS issuance, total commercial real estate loan securitization volume was $90.3 billion, down only 4% from the previous year. Some predict CLO issuance, which is fueled by alternative lenders, could reach $20 billion in 2019.
The expectation, at least during much of last year's second half, was that long-term interest rates would pressure the real estate sector. But a funny thing happened on the way to the forum. Interest rates have actually declined as volatility became king. That hasn't quite benefited the commercial mortgage sector as CMBS spreads have climbed. Property investors and balance sheet lenders also are exercising greater caution. The silver lining is that credit remains healthy, with overall CMBS delinquencies almost as low as 3%. If you only count deals issued since the Great Financial Crisis, the delinquency is a mere 0.62%.