CMBS issuance finished 2015 on a high, as total deal volume rose to the strongest level since 2007.
On the performance front, CMBS delinquencies rose modestly in December, increasing to 5.17% from 5.13% in November 2015. Even so, the delinquency rate is still 58 basis points lower than at the end of 2014.
What’s in store for 2016? We’re likely to see another robust year of issuance, underpinned by strong property fundamentals and a heavy pending maturity calendar. Two areas of concern remain. 1) Are property valuations over-stretched? and 2) How active will the Fed be in driving rates higher? Equity market volatility may keep longer rates range-bound, however; 10-year US treasury yields today (2.19%) are lower than they were during December, for example.
Commercial lenders have kept underwriting standards firm; even with modest increases in lending rates during 2015, loan-to-value (LTV) ratios have remained relatively constant. All of this should serve to remind market participants that the Federal Reserve (alongside the OCC and the FDIC) will be watching bank risk management practices carefully. Just before year-end, the agencies released a joint statement that “financial institutions should maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. Financial institutions should have risk-management practices and maintain capital commensurate with the level and nature of their CRE concentration risk.” Meaning: Don’t expect to see any easing of LTVs or debt service coverage ratios (DSCRs) anytime soon.