Commercial Real Estate Debt

By early in the fourth quarter of 2020, the significant rally in CMBS prices experienced in the preceding months seemed to be losing momentum due to mounting concerns about COVID-19 and U.S. presidential election-related tail risk; however, positive momentum was quickly regained in early November. This was initially motivated by bullish sentiment on the back of the election results, and risk-on sentiment was further elevated by the announcement of positive vaccine trial results from both Pfizer-BioNTech and Moderna.

One additional concern weighing on the market at the start the fourth quarter was the potential for additional selling pressure related to an annual update of CMBS capital charges from the National Association of Insurance Commissioners (NAIC). This guidance turned out to be more punitive than many expected and resulted in massive amounts of selling, primarily of AA- and A-rated conduit securities. Somewhat surprisingly, this wave of supply was easily absorbed by money managers and other large investors not subject to the new NAIC guidelines, resulting in overall spread tightening, which allowed the market to end the year on a positive note.

Regarding valuations over the course of 2020, we estimate that CMBS conduit AAA bonds started the year at approximately swaps plus 95 basis points, tightened to the mid-80s by February before widening into the mid-300s at the height of the pandemic-related panic, and subsequently tightened back to around swaps plus 80 to end the year. The moves in BBB- bonds were even more dramatic, starting the year in the mid-300s, tightening to the low 300s before gapping out to well over swaps plus 1,000 basis points, and then ending the year in the low 400s range.

Delinquency data by property type also provides an interesting perspective on this difficult year. The industrial sector fared best, with delinquencies rising from 1.4% to a peak of just 1.8% and then falling to 1.2% at year-end. Office and multifamily properties largely followed similar patterns, with delinquencies ending the year around 2.2% and 2.9%, respectively. Retail was quite negatively affected, with delinquencies rising from 4.4% to as high as 18% and ending the year at 13%. Hotels were most impacted, with delinquencies rising from 1.5% to 24% and ending the year at 20%. Notably, when hotel loans in special servicing or on servicer watchlists are included in this metric, approximately 70% of all securitized loans in that space showed some level of distress at their peak this past year.

Finally, one underreported success story for commercial real estate debt in 2020 was the relative health of the new issuance market, where volumes totaled approximately $60 billion. While lower than the $100 billion seen in 2019, it took four years after the global financial crisis to see a similar rebound.

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The market was able to produce approximately $10 billion of new issuance each quarter since the outbreak of COVID-19.

Property transaction volumes dropped significantly in 2020 but are expected to recover in 2021 and beyond.

Loans secured by hotel and retail properties have experienced significantly more difficulties than other property types.

Scheduled CMBS loan maturities are manageable for the next two years before increasing in size.

Angelo Gordon’s Capital Markets Perspectives

AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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