Wall Street braces for slowdown in commercial mortgage bonds
(Bloomberg) – The Federal Reserve’s tightening campaign has slowed trading activity in commercial real estate markets, leading Wall Street unions to forecast lower sales of bonds that securitize underlying mortgages.
Analysts were expecting a busy year for real estate players. And early on, it did: Acquisitions in the first half of 2022 outpaced those in the first half of 2021, driven in part by private equity firms with plenty of dry powder to deploy ahead of the crunch, according to JPMorgan Securities. LLC. But rising interest rates have since dampened that enthusiasm, leading the bulging bank to lower its CMBS issuance forecast for the full year by 7%, to $312 billion from $337 billion.
The decline in bond sales will most likely come from a pocket of the private label CMBS market: securities backed by a single asset and a single borrower, or bonds that recondition a mortgage tied to a single property or group of buildings belonging to the same firm. JPMorgan has cut its SASB forecast twice this year, cutting it to $60 billion from $75 billion in its latest revision on Sept. 9.
“Much of the activity has been concentrated this year before rates rose,” said Chong Sin, executive director and head of CMBS research at the bank and one of the authors of the Sept. 9 report. “Buyers were often under contract on properties before the macro environment changed and then they had to impose closures. SASB helped fund some of the larger deals.
SASB’s sales topped 2021 numbers in the first half of the year, hitting $31.85 billion in May, compared to just $19.54 billion at the same time last year, according to data from Bloomberg. The increase in issuance paralleled underlying M&A real estate activity. Private equity firms were sitting on a heap of $245.2 billion in capital for real estate purposes in North America at the end of 2021, according to financial data firm Preqin. This money was supposed to be used to buy and sell properties, mainly in the United States, in turn feeding SASB’s issuance.
Unlike conduit agreements, which include a variety of loans, SASBs are easier to analyze and have over time become a favorite for investors looking for more yield. SASBs also tend to be variable rate, a feature sought by investors as the central bank entered its up cycle.
Among those deals was a more than $3 billion SASB transaction – the largest of the year – issued to fund the acquisition of The Cosmopolitan of Las Vegas. Stonepeak Partners, Blackstone Real Estate Income Trust and the Cherng Family Trust purchased the property in May and blocked funding shortly thereafter.
Read more: Banks raise prices for CMBS Cosmopolitan Vegas deal by $3 billion
But over the summer, M&A activity faltered as mortgage rates soared and the cost of operating the CMBS market rose. For example, Blackstone priced an over $2.7 billion SASB deal in August with a 260 basis point discount margin on the largest tranche, while a similarly sized deal with The company’s different guarantees in February had a discount margin of 110 basis points on the equivalent. slice.
As a result, the flurry of SASB issuance activity seen in the first half of the year slowed over the summer to match 2021 figures. In August, year-over-year issuances s were $38.47 billion, up from $37.3 billion a year earlier, according to Bloomberg data. The rush to finance properties has come to an abrupt halt.
“Higher rates affect issue volumes in many ways,” said Darrell Wheeler, researcher at Moody’s Analytics. “The most obvious impact is a decrease in existing prepayments and an increase in extensions, which will reduce volumes.”
Read more: Fed trumps longer after US inflation surprise
But the pause is not necessarily bad news for the sector, according to market participants, who say it has been overloaded with supply for months.
“It was one of the few sub-sectors to beat the trend in the first half of the year, and the market was just saturated with CMBS supply, so the pullback in issuance expectations was a good thing,” David Goodson, head of securitized credit at Voya Investment Management, said in an interview.
The smaller pipeline could also be positive for spreads. “The slowdown in supply should help hold spreads towards the end of the year,” Sin said. “And the story of the spread can get even more positive if we start to see the macro story turn into a better place.”
Meanwhile, analysts at BofA Securities Inc. said they “remained neutral” on CMBS in a Sept. 9 note, noting that it would be difficult for spreads to recover in the current macro environment.
Relative value: AAA
- BofA analysts believe yields on AAA securitized products are “very attractive,” according to a Sept. 9 report. The market has already largely priced in about 150 basis points of the Fed’s rate hikes expected over the next five months, making the ICE AAA ABS Index yield of 4.26% attractive.
- Floating-rate AAA CLOs offering yields around 5.2% are also attractive, as are CRE CLOs and SASB CMBS, they said.
- Meanwhile, agency MBS yields are also attractive, hovering around 10-year highs, but are less attractive than other securitized products due to Fed balance sheet uncertainty.
“Fixed income today offers reasonably attractive opportunities for the first time since 2018,” Bob Miller, head of Americas fixed income fundamentals at BlackRock Inc., told Bloomberg Television’s Surveillance on Monday. “You can build a high quality portfolio that has a 4% to 5% yield, including treasuries, high quality credit, even add high quality high yield, especially in fixed income Americans.”
ABS offers in the queue include Ford (Prime Auto Loan ABS), Nissan (Prime Auto Loan ABS), and New Hampshire (Private Student Loan ABS).
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