Economy Watch: Quality of CMBS Improves in Q1, Says Moody’s

The quality of new CMBS loans improved as commercial property prices leveled off in the first three months of 2016.

The quality of new CMBS loans improved as commercial property prices leveled off in the first three months of 2016, Moody’s Investors Service says in a new report, “Sector Update – Q1 2016 New Loan Quality Improves as Asset Prices Level Off.” The rating agency said that the report is the first of what will be quarterly overviews of the U.S. commercial real estate and CMBS markets.

Aaa (sf) bond spreads were volatile during Q1 2016, contributing to slowing conduit loan origination, said Moody’s director of commercial real estate research, Tad Philipp. “But over the last few transactions Aaa (sf) spreads have tightened and conduit issuers have ramped up their lending again.”

Given volatile CMBS spreads, life insurance companies had a competitive edge relative to CMBS for loans on high-quality properties during Q1. “CMBS accounted for about 20 percent of overall commercial lending activity last year, about half its share at the pre-crisis peak,” Philipp added.

New risk retention regulation for US CMBS goes into effect late this year, though its final form remains uncertain. Given that risk has typically been retained by the buyers of subordinate bonds, many of these bond buyers will need to recapitalize or restructure to ensure transactions comply with the new rules, which could disrupt issuance, the Moody’s report also said. And while some issuers are looking into retaining a “vertical strip,” this may not be ideal for their balance sheets.