- 2024 showed a remarkable, triple-digit surge in CMBS issuance compared to 2023 activity.
- Major industry players like Blackstone are behind growing investor confidence in CMBS loans, which are increasingly offering 5-year terms.
- But even though they’re cost-effective, CMBS loans are still complex and can become tricky to navigate when it comes to defaults.
CRE borrowers are facing plenty of refinancing hurdles right now, and traditional forms of lending are shrinking. But CMBS is back in style, as reported by Commercial Observer.
Unexpected Revival
After huge drops in 2023, CMBS issuance is surging in 2024, with private labels reaching $32.2B in YTD lending, compared to $13B a year ago, according to the Commercial Real Estate Finance Council (CREFC).
This spike in activity stems from growing investor favor for CMBS, thanks to its overall cost-effectiveness, amid broad and rising market distress. The rise in private-label CMBS issuance, driven by major players like Blackstone (BX), shows serious investor confidence, especially as traditional bank lending keeps drying up.
In fact, if forecasts are any indication, investors won’t be able to acquire CMBS loans soon enough. Based on origination trends, future defaults are expected to worsen throughout the decade.
The Evolution of CMBS
CMBS pricing has seen its fair share of fluctuations, with spreads tightening for investment-grade securities. Despite concerns over defaults, the allure of CMBS loans lies in favorable financing rates for borrowers compared to other sources, attracting investors and borrowers in need of liquidity.
The cost of capital also remains a key factor, with CMBS lenders leveraging current market conditions to charge premium spreads, benefiting from the limited options available.
Most CMBS loans have transitioned from 10-year to 5-year securitizations, introducing shorter pre-payment periods to accommodate borrower demand. Post-GFC regulations have also heightened oversight, transforming the viability of CMBS loans for borrowers.
Why It Matters
While CMBS presents an attractive financing proposition, its intricate structure poses challenges during defaults and special servicing. Borrowers navigating the intricate system face hurdles, while investors rely on bond ratings for assurances, leaving backend complexities to servicers and bondholders.
Naturally, misalignments between borrowers, special servicers, and bondholders highlight inherent risks in the CMBS system. Senior bondholders aim to protect AAA risk while junior bondholders seek forbearance. The role of special servicers in loan workouts also raises questions about whether protecting real estate or bondholder interests is more important.
These risks only become more pronounced during times of distress, as seen in recent defaults. Continued oversight is crucial.
