Los Angeles – October 31, 2017 – According to CBRE, despite an increase in short-term interest rates (+.32% monthly change to 5-year treasury), capital markets continued to improve in Q3 with rising equity prices, tightening spreads and limited volatility. Most analysts expect an additional short-term rate increase from the Federal Reserve in December and three more rate hikes in 2018. But because the inflation rate remains below 2%, the Fed may have a more accommodative short-term interest rate policy.
After a strong start to Q3, the CBRE Lending Momentum Index fell by 4.7%. On a year-over-year basis, the index is up by 16.9%. CBRE’s measures of loan underwriting remained relatively steady, with modest changes toward more conservative underwriting between Q2 and Q3. Underwriting still is slightly more aggressive than a year ago. Nearly 58% of loans in Q3 carried interest-only terms, down 90 bps from Q2 but above the 52.1% level in Q3 2016. Slower apartment and office transaction activity likely will restrain overall transaction activity in 2017 compared to a year ago. Nevertheless, there finance pipeline likely will remain favorable, as the market works through the remaining “wall of maturities.” The recent tightening of spreads is a promising sign that liquidity will remain favorable and mortgage rates will remain low.
October conduit issuance matched September’s numbers with 5 new deals pricing for a total of $4.97b, bringing the YTD total to $37.97b across 40 deals. Pricing for the LCF AAA ranged from S+80-93, while pricing on the AA- ranged from S+135-165 and A-ranged from S+175-220. The AAA LCF outperformed the rest of the new issue stack in terms of tightening in October, as the spread ranges on the AA- and A-were very similar to last month’s ranges but the tight print last month was S+89 on the AAA versus S+80 this month. The demand for AAA bonds (both in new issue and secondary) has been extremely strong with primary pushing secondary ever tighter. Interestingly though, the bid for secondary in the mezz space (AA-and below) continues to be very strong but new issue demand for mezz has been less robust with only one deal (BNK8) seeing massive oversubscription. With collateral quality just average and the large RR premium at the mezz tranches, investors seem less axed to pay up for new issue. In SASB space, 6 deals priced this month for a total of only $3.565b. There were 2 small floating rate deals ($1.365b) and 4 fixed rate deals ($2.2b). Selective preplacement of SASB deals continue to be prevalent. One large loan floater ($496mm) and one CRE CLO ($456mm), which was entirely preplaced, also priced this month.
Trading volumes in the secondary market picked up significantly this month as dealers and investors looked to add paper. Generic spreads in secondary were tighter across the board with the top of the stack outperforming. AAA LCF bonds tightened by around 10 bps on the month with AS/AM bonds also tighter by about 10 bps. AA- and A- were both roughly 15-20 bps tighter, while BBB- was quoted about 20-35 bps tighter. Credit challenged names continue to trade wide to higher quality names, but the more generic concerns that typically push certain names wider (dealer sponsorship, rating agencies, etc.) seem to have been all but forgotten as the tiering curve flattened significantly in credit.
Feel free to download our monthly email newsletter. To receive these reports each month, subscribe to our email list.