Los Angeles – December 31, 2017 – According to Situs RERC, investment conditions improved for all property sectors compared to the previous quarter except for hotel. The industrial sector provided the strongest investment conditions as online retailers continued to demand more space for warehouses and implemented last-mile delivery strategies. Despite the negative news coverage about the retail sector, investors were more positive across all retail subtypes compared to last quarter. Investors may be more optimistic about investment conditions for retail because of the better-than-expected holiday sales recorded for brick-and-mortar stores. The largest improvement in retail investment conditions ratings was for power centers, which rebounded after a sharp drop in the third quarter.Central Business District (CBD) office recorded one of the largest increases in investment conditions compared to other property types. CBD offices (compared to suburban offices) are more likely to have the state-of-the-art amenities and technology-driven open spaces that tenants demand. The increase for investment conditions for CBD office may also reflect the continued desire of millennials, and their employers, to be situated in easily walkable, urban areas. However, we note that if/when more millennials begin to start families, we could see a disruption in this trend.
Issuers managed to price 5 conduits for $4.3b in the first 3 weeks of December, with only one deal pricing after the 12th. This brings the 2017 total to $47.1b across 51 deals. At $47.1b, conduit issuance was pretty much on top of 2016 conduit issuance, which was significantly less than the $62b that priced in 2015. Pricing on the AAA LCF priced in a relatively tight range from S+81-84 for the first 4 deals but leaked out S+87 on the last deal, which likely suffered from being a weaker deal/shelf and the timing of the deal (priced on 12/20). The AA’s in December ranged from S+125-148, with A’s ranging from S+175-230. In SASB, 8 deals priced totaling around $3.5b, comprised of 2 fixed rate ($404mm) and 6 floating rate deals ($3.14b), one of which was a $1.38b refinance of the Cosmopolitan Hotel in Las Vegas. Several of the deal were fully or partially preplaced. Blackstone priced their $1b inaugural CRE CLO, which is the largest post-crisis CRE CLO to date.
Secondary spreads for pre-RR bonds were generally flat to a few bps tighter on the month with the exception of A- bonds which were a few bps wider for generic names. On the year, all per-RR tranches were tighter, with AAA LCFs around 20+bps tighter, AA- around 10-15bps tighter, A- bonds 50+bps tighter with generic BBB- bonds over a 100bps tighter. With no issuance expected until mid-January because of the annual CMBS conference, spreads should be poised to tighten barring any macro disruptions.
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