Over the past 21 months, CRE financing has adjusted to ongoing COVID-19 property performance uncertainty with borrowers and bankers shifting from fixed-rate lending to more floating-rate bridge loan financing. This floating-rate shift drove more than $260 billion of securitized issuance in 2021. We expect 2022 will see an increase to $340 billion (as shown in Exhibit 5). Exhibit 1 displays quarterly CRE issuance over the past three years showing a pre-COVID-19 peak in the third quarter of 2019, a drop in the first half of 2020, and then a gradual expansion that started in mid 2021 which was led by Freddie K issuance (the dark green bar). By early 2021, floating-rate CRE CLOs and SASB issuance became the major quarterly issuance components as COVID-affected financials in many instances were insufficient to refinance into more rigid fixed-rate origination parameters. This led most borrowers to switch to bridge financing, which has the flexibility to underwrite a further COVID recovery giving borrowers the ability to prepay their loans if and when their property performance stabilizes.

Exhibit 1: CRE Securitized Issuance ($Billions, since January 2018)

This graph shows the amount of CRE securitized issuance by quarter since the beginning of 2018, divided into Freddie Mac, Fannie Mae, Ginnie Mae, CMBS Conduit, CRE CLO, CMBS SASB, and other CMBS issuance. Each quarter has seen anywhere from $36 billion to $98 billion in issuance. Overall issuance was highest in Q3 2019, but the next four highest quarters have been Q4 2021, Q2 2021, Q1 2021, and Q3 2021. While CMBS Conduit issuance averaged around $10 billion per quarter from 2018 through Q1 2020, that has decreased to $5-7 billion per quarter since Q2 2020, even as overall issuance has increased. The main drivers of the growth in issuance in 2021 have been CRE CLO and SASB issuance. CRE CLOs, which generally saw $3 billion or less in quarterly issuance prior to 2020, now show issuance of around $10 billion per quarter. Meanwhile, quarterly SASB issuance was around $10 billion per quarter in 2018 and 2019 (except for Q3 2019, which had about $20 billion in SASB issuance), but that has risen to $15 billion per quarter in Q2 and Q3 2021, and nearly $30 billion in Q4 2021. Quarterly issuance by Freddie and Fannie have remained relatively constant at around $20 billion and $5 billion, respectively (with the exception of Q3 2019, when nearly $40 billion of Freddie Mac bonds were issued). Lastly, Ginnie Mae issuance has grown from around $3-5 billion per quarter through Q1 2020 to around $10 billion per quarter since then.

As we go to print, 2021 has reached a record issuance level of $78.31 billion for single-asset single borrower (“SASB”) and $45.44 billion for CRE CLOs. In contrast, fixed-rate conduit issuance only reached $30.80 billion, while Agency CMBS remained relatively steady at $159 billion. CMBS conduit and Agency CMBS are mostly fixed rate loans that have seen their loan sizing impaired by COVID-19’s impact on 2021 cashflows.

Exhibit 2 uses fourth quarter loan data to compare leverage and pricing levels for conduit and SASB loans. The Exhibit highlights the advantage floating-rate originators appear to have in the current environment.  The underwriters’ SASB leverage and pricing figures are dominated by the quarter’s record amount of Industrial SASB issuance. This contributed to $8.7 billion of issuance during the quarter, was sized at an average 69.8% LTV and average debt yield1 of only 5.91%, with one loan having a 5.24% debt yield.  The conduit leverage characteristics are significantly more conservative than the SASB figures with an average LTV of 54.24% and debt yield of 11.33%. Overall, SASB transactions averaged a 13% higher LTV, had underwritten debt yield that was 5% lower, and priced with an average floating-rate coupon of 2.01%. Any future increases in LIBOR or SOFR may reduce that cost advantage, but right now SASB leverage and pricing appears very compelling versus the fixed-rate conduit leverage and longer-term coupon of 3.38%.

1 Debt yield is the percentage of underwritten property net operating income to outstanding debt. The market considers this percentage the amount of cashflow available to service debt. In recent years debt costs have been less than 4.5%, but market participants usually underwrite debt yields greater than 6% to allow for where future interest rates may be at the time the mortgage matures.

Exhibit 2: Fourth Quarter 2021 Loan Characteristics by Property Type (The SASB is not 100% floating as the office is fixed) (Click Image to View Large Version)

Source: Moody's Analytics CMBS Loan Data, as of December 20, 2021

The comparison shows significant leverage and pricing differences between conduits and SASB:

CMBS conduits have taken on retail and hotel loans at lower leverage levels. The retail loans had a DSCR of 2.92x and debt yields that averaged 11.86% while the hotel loans had underwritten DSCR of 2.96x and a debt yield of 16.31% (no conduit hotel loan had a debt yield less than 12.47%).  Hotel loans had the highest LTVs among the conduit cohort at 60.84% LTV.

The conduit sample did show some higher leverage loans. The lowest debt yield for each category ranges from 6.46% to 7.86% for every property type except for hospitality and cooperative housing.

The average conduit coupon of 3.38% is 58bp wider than the office fixed-rate SASB coupon which had similar terms. This fixed-rate SASB loan will create triple-A A-notes that are placed into conduit transactions at very tight spreads, which likely kept the SASB pricing down.

Multifamily was the 2nd largest SASB property type. The advantage of originating and issuing multifamily SASB is likely the debt yield and pricing. The debt yield was 6.61% with one loan having a 5.35% debt yield. For conduit multifamily loans we separate out the lower leverage Co-Op loans to see multifamily conduit loans are offering attractive leverage to borrowers, but not as compelling as the levels available by arranging a multifamily SASB transaction. The multifamily weighted average spread was also the tightest among the SASB property types at 162 bps.

SASB issuance has been boosted by the average loan margin of only 191 bps, with one month LIBOR having been at low double digits for some time. Investor demand has reinforced this issuance as the investor market that has been anticipating rate increases and so has been searching for bonds that will benefit from higher rates. As we move into 2022, LIBOR will be replaced by SOFR in floating-rate SASB transactions as was demonstrated by one of the MSC 2021-NRD retail mall SASB that priced on December 16th (shown in the SASB listing Exhibit 8). However, the fixed rate market is still undecided on whether Treasuries or the SOFR Swap will replace their typical swap yield base reference. That indecision may initially create a January conduit issuance slowdown, but eventually the market will likely follow the benchmark used by either the Freddie Mac fixed-rate K program or the two major CMBS conduit programs (all of which have new issuance scheduled for early January). As loan performance continues to recover from COVID, fixed-rate loan issuance should increase in 2022, but floating-rate loans has offered borrowers a clear coupon saving and leverage advantage which will likely continue to dominate issuance well into 2022.

To consider what 2022 issuance could bring, Exhibit 3 breaks 2022 loan maturities down by property type and current debt yield. Exhibit 3 combines $69.4 billion of loans that mature in 2022, but for our underlying analysis we did break maturities into $20.0 billion of conduit loans, $23.5 billion of Agency loans and $25.9 billion of SASB loans. Using this maturity format, we segment the loans that we would expect may use conduit financing versus using floating-rate SASB or a bridge loan that may go into a CRE CLO. To supplement the ~$70 billion of 2022 loan maturities, we included the remaining loans that matured in 2021, which consisted of $2.47 billion from Conduits and $16.1 billion from SASBs that were extended. Many of these 2021 maturities had low debt yields and so defaulted at maturity or, in the case of SASB loans, used their extension option. The left side of the Exhibit 3 shows that ~$15 billion of the loans that mature in 2022 have debt yields less than 6%, but then our 4th quarter loan analysis suggests some level of low debt yield loans can still be securitized in both conduit and SASB formats. That recent securitized loan analysis allows us to evaluate the Exhibit 3 maturities and consider just how much of each property type at each debt yield category may be able to refinance into conduit, SASB, CRE CLOs, or may not refinance. This review also allowed some level of low debt yield retail and hotel loans to refinance, as borrowers may pay down equity to refinance.

Exhibit 3: Summary Loan Maturities by Product Type and Debt Yield

Source: Moody's Analytics CMBS Loan Data
*Multifamily is based upon available conduit and Freddie maturities as well as an estimate of Fannie and Ginnie maturities

Loans maturing with debt yields higher than 10% were mostly assumed to refinance into conduit and SASBs. We also considered a portion of the $87.2 billion of loans that mature in 2023. Having applied this approach to forecasts in previous years, we know it is necessary to further adjust our forecast to reflect transaction volumes. Transaction volume can force a refinancing when properties trade, which supported many of the SASB transactions and multifamily transactions that took place in 2021. But some of the 2021 stranded properties that were not able to refinance may see the borrower sell in order to pay off their debt obligation, which also creates a sale transaction that needs to be refinanced. This sale generation translation to loans may eventually arise from properties that have not been able to improve performance and where the borrower has opted to no longer contribute value, which will lead the special servicer to start foreclosing, or the borrower may decide a sale is necessary to raise proceeds to pay off the mortgage. To consider how 2022 sales may further support mortgage originations, in Exhibit 4 we look at quarterly property transaction volumes.

Exhibit 4: Commercial Real Estate Transaction Volumes ($Billions)

This graph shows the volume of commercial real estate transactions each quarter since the beginning of 2019 for select property types (apartment, industrial, office, retail, and hotel). Most property types have seen local peaks in transaction volumes in Q4 2019 and Q4 2020, with local troughs in Q2 2020. Apartment transactions rose to $36 billion in Q4 2019 before dropping to just over $10 billion in Q2 2020, then increased back to nearly $37 billion in Q4 2020 before declining again to $21 billion in Q1 2021. Industrial transactions reached $16 billion in Q4 2019, then declined to $8 billion by Q2 2020 before rising to nearly $20 billion in Q4 2020. Office property transactions totaled about $30 billion in Q4 2019 before decreasing to around $9 billion in Q2 2020. They then rose to nearly $15 billion in Q4 2020 but then declined to around $10 billion per quarter after that. Retail transactions were between $15 billion and $19 billion per quarter throughout 2019 before declining to under $7 billion in Q2 2020. Since then, transaction volumes have been on an uneven recovery, reaching $12 billion in Q4 2020 but being as low as slightly under $8 billion in Q1 2021. Quarterly hotel transactions peaked at nearly $16 billion in Q4 2019 but then dropped to below $2 billion in Q2 2020. Since then, they have gradually risen to over $7 billion in Q2 2021. Most recently, all property types registered moderate increases in transaction volume in Q2 2021 compared to Q1 2021.

Source: Moody's Analytics CRE

Overall, 2021 sales transaction volumes were down ~67% when compared to 2019, and yet multifamily volumes have been near pre-COVID levels, as investors view housing as somewhat immune to the crisis.  Part of this perception comes from multifamily asking rents having spiked 7.5% in 3rd quarter of 2021 as reported in a Moody’s Analytics CRE report2. Our most recent sales transaction data only captures the first half of 2021, but quarterly volumes had been trending upwards and recent transaction reports have us expecting 2022 will bring further sales volume increases, which should boost 2022 loan originations.

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