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Commercial Real Estate Monthly Recap – July 2018

Los Angeles – July 31, 2018 – According to CBRE’s Q2 2018 U.S. Lending Figures reports, although lower loan maturity volumes have resulted in less originations this year, the commercial mortgage market remains in good shape overall. With an additional short-term policy rate increase by the Federal Reserve in June, the yield curve has continued to flatten. As of mid-July, the spread between 10-year and two-year Treasury bonds was only 25 bps—the tightest level since before the 2008 recession, when the yield curve inverted. Q2 lending volume, as measured by the CBRE Lending Momentum Index, was even with Q1 levels. Compared to a year ago, however, the index is down 10.6%. Agency multifamily lending is quite active. Year-to-date through May, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $43 billion, not far off the record-setting pace of $44.6 billion for the same period in 2017. Overall debt service coverage and LTV ratios in Q2 were consistent with the prior quarter. The percentage of loans carrying interest-only terms was 61%, down 5 percentage points from Q1. According to CBRE, there has been no substantial deterioration in loan underwriting measures over the past several quarters.

Conduit issuance was light in July with only 3 deals pricing for a total of $2.8b, bringing the YTD conduit total to $22.45b across 24 deals. With all 3 deals being issued off relatively high quality shelves, the range of prints across the stack narrowed in August, with the AAA LCF pricing in a tight range of S+84-87. The rest of the stack was similarly tight with AA- bonds ranging from S+120-130 and A- bonds ranging from S+150-160. The SASB new issue space was very active again in July with 12 deals pricing for $5.42b. Of this issuance, $3.52b was floating rate, while the remaining $1.9b was fixed. Three CRE CLO’s also priced for $1.16b. In the secondary market, AAA LCF bonds tightened 3-5bps, as the lighter supply in new issue and the stronger prints from higher tier shelves helped spreads stabilize. The stronger new issue mezz prints also helped secondary, which already trades significantly through primary for most deals. AA- bonds saw some modest tightening of 3-5bps, while A- bonds were tighter by closer to 10-15bps. BBB- bonds performed very well in July, with bonds tightening anywhere from 15-25bps.

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Alice EricsonCommercial Real Estate Monthly Recap – July 2018