Los Angeles – November 30, 2016 – The story this month has been rising treasury rates. The 10-year rose 56 bps in the month of November, which has prompted borrowers and investors to revisit spreads. Corporate bond yields have remained unchanged, but Fannie/Freddie spreads have come in 10-15 bps across the board with spreads for AA CMBS bonds declining by 25 bps. Over the last 10-years, the 10-year treasury rate has ranged from a low of 1.32% (7/10/16) to a high of 5.29% (6/12/07) and averaged 2.78% over that period of time. According to the 3Q 2016 Real Estate Report from Situs RERC, they expect the 10-year treasury to range between 1.50% to 2.60% through 2018, reflecting accelerating economic performance, the Federal Reserve increasing interest rates, and the new political environment having a positive impact on investment, as investors deploy an increasing risk-on position. The report goes on to quote experts from ValTrends who see values coming under pressure relative to price levels for CRE in third quarter 2016. Their prediction is that we are still a couple of years out from a market correction. It is likely that the U.S. CRE investment market will plateau and hold on to its income component, but that it will lack capital appreciation like the past. CRE is still the best “bang for the buck,” according to Situs RERC’s institutional investment survey respondents in the third quarter of 2016.
November ended up being a relatively robust issuance month for CMBS, with 8 conduits ($6.8b), 7 SASB ($4.1b) and 2 CRE CLOs ($500mm) pricing. Two of the conduit deals were risk retention compliant deals, which helped them price tighter than generic deals, although neither was as well received as the first risk retention deal. YTD Conduit issuance now totals roughly $42b and another 5 deals are expected to come in December, which may add an addition $3-5b to that number. Much of the November (and expected December) supply is being driven by dealers wanting to clean up their balance sheets before risk retention takes effect in 2016. Given this dynamic, this last set of deals has been pretty average with heavy retail and a high number of pari passu loans that appear in multiple deals. The mediocrity of these deals has been helped by tighter secondary spreads which has kept new issue spreads interesting at relatively tighter spreads given the collateral quality. Secondary spreads tightened across the board in November with the A- tranche outperforming the rest of the stack as it remained the sweet spot for investors looking for yield without having to dip into the BBB- part of the capital stack. We would expect that the lack of supply once this last group of deals prices to be a tailwind for tighter spreads to finish off the year.
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