Commercial Real Estate Debt
After a very strong start to the year, the price recovery in the CMBS market continued into the second quarter, albeit at a more moderate pace. At the top of the capital structure, we estimate that new issue AAA conduit spreads ended the quarter at 65 basis points over swaps—about 7 basis points tighter than the start of the year. BBB conduit spreads ended June near 280 basis points, nearly 100 basis points lower than six months earlier. These levels represent multi-year tights on both a spread and yield basis.
Conduit issuance has been a declining portion of total securitized commercial real estate debt volume this year. Single-Asset/Single-Borrower (SA/SB) issuance has increased dramatically, and CRE CLO volume in the first half of 2021 was nearly equal to the record full-year issuance level of 2019. While traditional conduit origination volumes have been hindered by a low amount of maturing loans, the CRE CLO market has benefited from strong demand for financing on transitional assets. SA/SB volumes are being helped by an uptick in M&A activity as well as some newer developments being brought to market.
Another interesting dynamic relates to interest rates. If a sponsor expected the yield curve would remain steep for an extended period of time, their borrowing costs would be lower with shorter-term floating rate debt than with long-term fixed-rate financing. On the margins, this benefits CRE CLO and SA/SB issuance at the expense of conduit deals. It is also worth noting that while the financial press has covered the topic of inflation extensively, the yield on the 10-year swap actually declined by 34 basis points during the second quarter.
According to Trepp, the percentage of CMBS loans with a special servicer (a more inclusive measure of distress than a simple delinquency rate) declined for the ninth consecutive month in June, decreasing to 8.24%. This represents a decline of 148 basis points from the start of the year and a drop of 224 basis points from the prior year peak of 10.48%. Once again, the hardest hit sectors in 2020 led the recovery in the second quarter, with the specially serviced rate in the hotel sector dropping from 24.16% to 18.68% and retail declining from 16.23% to 14.43%. Office special servicing rates held steady at approximately 3.00%, while the industrial sector continued to shine, ending the quarter at less than 1.00%. Loans secured by multifamily properties also experienced stable specially serviced rates, ending the quarter at 2.70%.
Overall, in spite of some genuinely positive news on combating COVID-19 and the reopening of the economy, we believe the impacts of this crisis will persist for a very long time.
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Issuance has picked up significantly in the first half of 2021, particularly in the SA/SB space.
CMBS delinquency rates declined slightly in June but remain elevated.
Headline CMBS delinquency rates still understate the amount of loans experiencing stress.
Interest shortfalls in conduit CMBS are concentrated in the high yield and non-rated portion of the capital structure.