Exhibit 1 provides a 2022 transaction pricing progression, with the first deals being a $2 billion CRE CLO transaction on January 7th, which was followed by the pricing of a Freddie Mac K deal and three fixed-rate SASB deals on January 12th. Before month end, the market expects to see at least 8 more SASB transactions and the first conduit of the year BANK-39. If we throw in two more CRE CLOs, this January should be able to duplicate the $20 billion that was issued in January 2021.
Exhibit 1: 2022 CRE Securitizations (Click Image to View Large Version)
To start the year with a $2 billion CRE CLO suggests investors are very receptive, which was further demonstrated by the credit curve pricing being flatter than December’s pricings. Some of this reception is due to the CLO being composed of loans on multifamily and manufactured housing, as there was clear perception that multifamily rents will continue to grow at a fast pace for at least the first half of 2022. Many multifamily borrowers are anticipating this further rental growth and are likely to continue to go with prepayable floating-rate loans in 2022. This should feed into our CRE CLO issuance figure of $50 billion for year, which suggests another $2 billion in issuance before month end. The placement of this amount of CRE CLO issuance remains a challenge, as demonstrated by triple-A spreads that are currently the widest ABS spreads available within the structured finance universe, as many traditional buyers prefer fixed-rate conduit production. Thus, the CRE CLO issuers were out in force at the conference talking the product’s strong collateral performance during the pandemic and how active management with a larger equity investment in the pool are benefits. In discussions investors are considering adding CRE CLOs to their portfolio and mentioned some type of investor reporting package (“IRP”) would be helpful to improve transparency. In conversations issuers counter such requests for a CRE CLO IRP by suggesting their collateral requires ongoing management that cannot be captured in static figures, and so it may be some time before the majority of CRE CLO issuers agree to an IRP format. On one panel, it was noted as a paradox that an industry which prides itself to be on the edge of new technologies doesn’t have a data standard for its fastest growing sector.
Looking at the first four SASBs of 2022 we can discern some pricing preferences as investors priced the Old Chicago Post Office the widest, as there are concerns around that specific market having become overbuilt (Moody’s Analytics CRE’s most recent office report also has oversupply concerns for this market). Self-storage SASBs priced tighter as investors expect that product type has good resilience. Then two LEED certified office buildings that priced as SS+85bp for the five-year bonds and SS+90bp for the 7-year bond showed strong investor demand. One would like to think this is because investors have taken up the ESG cause, but in the case of office it appears to be new concerns around building obsolescence, as recent leasing activity has shown a leasing advantage for buildings that offer newer amenities. Speaking with several business acquaintances during the COVID lockdown, larger, public companies have new ESG requirements that would make it difficult for them to stay with a traditional building, while smaller companies are looking for better space in order to attract their workers back into the office. These are real examples of how the commercial real estate market is evolving for ESG and COVID, which is now translating into SASB office pricing. So, while the post office transaction was a reasonably strong SASB with good tenants and it would be difficult to imagine the AAA class missing a payment, it appears that green building fundamentals have started to affect pricing. There was further discussion on the ESG panel to develop new technologies to help all buildings reduce their carbon emissions, but as of right now the changes needed for older class A office buildings mean we will likely see a green premium develop in SASB pricing. That better pricing will hopefully eventually drive physical plant capital expenditures to upgrade those older buildings.
The conference had an overall constructive tone, and the initial rush of fixed-rate SASB transactions will create A-notes to be included in CMBS conduit issuance. Yet many remain concerned that CMBS conduit issuance will remain low in 2022. We discussed this concern in our year-end article. Yet looking at 2021, there was not much fixed-rate SASB; if that increases then the market may yet have a chance to get to our $40 billion of conduit issuance, we currently have in our forecast below.
Exhibit 2: Historical CRE Issuance and Our 2022 Forecast
Overall, the CREFC conference gave the market a good start on 2022 issuance, but we are only a few weeks into the new year.
Darrell Wheeler is a CMBS researcher for Moody's Analytics Structured Solutions group. He creates insights from their commercial real estate data and extensive loan performance database. Darrell has more than 20 years’ experience generating CMBS research, and has held positions across various financial institutions.
Brian Schoenfeld is an analyst on the Moody’s Analytics CMBS desk within the Structured Solutions group. Prior to this role, he attended Dartmouth College, where he majored in Mathematics.
David Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, providing timely and insightful data analytics to CMBS and CRE professionals. Prior to his current role, he managed the ABS desk and worked on various CLO related projects.