Green Shoots Appearing in the CMBS Market

August 20, 2020

 

By James M. Molloy, MAI, FRICS, CRE

Takeaways:

  • CMBS activity is accelerating
  • There are significant performance disparities within asset classes
  • Location matters more than ever
  • In CBD office markets, landlords are offering concessions to buy face rent and term from high-quality tenants
  • Each cash flow modeling assumption must be examined for adjustments based on the status of a specific asset and market

Green shoots are appearing in the market for commercial mortgage-backed securities. CMBS, which typically sees $80 billion to $90 billion of annual activity, seized up when the coronavirus pandemic hit.  Four months after the initial panic, market participants are adjusting market conditions. With interest rates plummeting to record lows and spreads narrowing again, owners and investors are capitalizing on opportunities to refinance maturing loans, or cash out to redeploy equity to other opportunities. Properties with stable, high-quality, long-term tenancies and strong income profiles are financeable at very attractive rates. The market is seeing multiple CMBS transactions involving multifamily, industrial, net-leased assets and well-leased prime office properties.

A chart indicating CMBS spreads

Source: Commercial Mortgage Alert, August 14, 2020

COVID-19 is a historically significant material event affecting each property and market differently. Tenancies have been disrupted and some operating expenses related to virus-mitigation are rising. The longer the pandemic continues, the more elevated the risk of permanent damage to an asset or locale.  The issues fueled by COVID-19 have made the commercial real estate landscape highly volatile. Every single cash flow modeling assumption must be examined for adjustments based on the status of a specific asset and market. While it’s clear that hospitality and retail properties have suffered more from pandemic shutdowns than industrial and multifamily, there are significant disparities within asset classes. A grocery-anchored strip retail center may be thriving compared to a traditional mall. Rental income at an industrial property occupied by global ecommerce firm may perform very differently from one master-leased to an apparel chain whose sales have been crushed by store closings.

Location clearly matters more than ever. What are the recovery prospects for a city such as Las Vegas, where much of the economy is driven by travel and tourism, versus Silicon Valley, where many high-tech companies are thriving amid the swift transition to digital? How are migration patterns influencing a specific market? While some observers have suggested the massive shift to remote work will impair office assets in major cities, Manhattan just experienced its biggest leasing quarter since the pandemic began and Facebook just made a large commitment to the Farley Post Office complex. Amazon just announced a major commitment to CBD offices around the country. Landlords seeking a long-term stable income profile are offering a range of concessions to buy face rent and term from high-quality tenants. With interest rates at historic lows, owners want to ensure their properties remain or become highly financeable.

SitusAMC anticipates that financing transaction momentum will continue to build as the U.S. nears a medical solution, and normalization eventually returns. In the meantime, every asset needs to be examined and valued very carefully and pragmatically. SitusAMC has been actively navigating the impact of COVID-19 in both the equity and debt sectors of the real estate industry, leveraging our deep knowledge and experience to deliver credible valuation results.

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