Needed Liquidity Boost as Collateral Quality Moves to the Forefront; Could Portend Bigger Things in 2013
The CMBS market is wrapping up its busiest new issue month since the downturn, with $7.2 billion expected to have been issued and notable, there is still a pipeline of $8.2 billion yet to come.
CMBS primary market activity to date in 2012 totals $24.09 billion, consisting of 17 multi-borrower deals totaling $18.33 billion and 14 single-borrower deals for $5.76 billion. The deals this month and currently in the pipeline would bring issuance to a robust $39.52 billion.
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"Taking together the close timing of deals, the large differences in loan quality, and limited differences in subordination, we expect price tiering between deals to increase," according to Marielle Jan de Beur, head of structured products research and managing director CMBS and real estate research for Wells Fargo Securities. "The greatest increase in this price tiering will become visible in BBB+ and BBB- tranches, in our view."
"As more transactions line up to price in short order over the next two months, we expect collateral quality to move to the forefront and price tiering to become more pronounced," Jan de Beur reported. "Issuance has remained strong for agency CMBS, and we expect total issuance in 2012 to surpass 2011. Assuming the agencies each issue another $4 billion-$5 billion in the fourth quarter, total issuance should be around $56 billion."
Despite the robust issuance, Wells Fargo Securities noted that transactions are well bid, resulting in tightening spreads.
"We are encouraged by the diversity of buyers in all parts of the capital structure for new issue transactions," said Jan de Beur.
She also cited Costar Group data showing that newer office inventory is outperforming older inventory, gaining nearly 600 basis points in occupancy, which is a positive indicator for CMBS 2.0 office collateral, she said.
JPMorgan analysts led by Ed Reardon last week upped their 2012 CMBS to $40 billion from $35 billion.
The activity has enabled conduit lenders to offer more attractive financing rates vs life insurance companies that may allow them to source more product secured by Class A assets and/or primary markets, according to Reardon.
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