Market discipline bodes well for CMBS

Strong underwriting, risk retention rules improving quality of loans

CHICAGO, Feb. 13, 2018 — Commercial Mortgage-Backed Securities lending made a strong comeback in 2017, rising to the second-highest level of originations since 2007. According to JLL research, 2017 saw CMBS originations grow to $95.4 billion, a 25.6 percent increase over 2016.

For 2018, the CMBS issuance outlook is more tempered: between $60 and $80 billion in the U.S., according to industry experts. But that dip could be a good thing, says Tom Fish, Executive Managing Director and Co-Head of JLL's Finance group.

"When you look at the different buckets of who is lending — Freddie Mac and Fannie Mae, life companies and debt funds — they are all competing for a piece of the same pie," said Fish. "The size of the CMBS market is where it should be at this point in the cycle, and it's continuing to provide a valuable alternative for property types that might not be getting life company or other institutional money because of lender selectivity."

Property types such as unanchored retail centers and hotels have benefitted from the CMBS market's strength. For instance, issuance of floating CMBS loans in the hotel sector grew from $2.7 billion in 2016 to nearly $14.5 billion in 2017, according to JLL's Hospitality Debt Market Commentary. Those loans, which are typically $200 million or larger, have been one of the stars of the hotel market's current run and have facilitated a number of large refinancings and acquisitions.

Several factors including a softening of transaction volumes, cap rate stability and few catalysts like 2017's "wall of maturities" — which came and went without the impact many had predicted last year — likely point to a more stable year for CMBS across sectors.

Added from Jamie Woodwell, Vice President of Commercial Real Estate Research for MBA: "2017 marked the end of the so-called 'wall of maturities.' It also marked an important turning point in the CMBS market.  For the first time since the Great Recession, we now have more in new loans being made in CMBS than in old loans paying-off and paying down.  The increasing balance is a mark of renewed interest and strength."

The measured CMBS market is also benefitting b-piece buyers. 2018 has already seen strong b-piece activity with Prime Finance opening two funds for a combined $1.3 billion, and homebuilder Lennar putting its Rialto Capital subsidiary up for sale.

"Disciplined underwriting and the perception that risk retention rules have improved loan quality in the CMBS market is making b-piece investment more attractive," said Fish. "The amount of CMBS issuance is something the b-piece market can digest readily, especially given the growing concentration of b-piece buyers."

He added, "Barring any macroeconomic shocks or some sort of huge interest rate change, 2018 will be a solid year for the CMBS market," said Fish.

JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm's in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2016 alone, the firm's 2,000 Capital Markets specialists completed $145 billion in investment sale and debt and equity transactions globally.

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About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the third quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of over 80,000. As of September 30, 2017, LaSalle Investment Management had $59.0 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated.