With a significant number of commercial real estate loans coming due in the next three years, industry analysts are predicting dramatic growth in the issuance of commercial mortgage-backed securities (CMBS).
According to a semi-annual forecast from the Urban Land Institute and Ernst & Young based on a survey of real estate analysts and economists, CMBS issuance is expected to increase to $100 billion in 2015, compared with $48 billion in 2012. Issuance in 2013 is forecast at $75 billion, rising to $88 billion in 2014. Those projections are up from six months ago when the forecast called for $70 billion in issuance this year and $80 billion next year.
Dan Fasulo, managing director at research firm Real Capital Analytics, calculates that CMBS issuance could reach above $80 billion this year. He also estimates that “well over” $1 trillion of commercial real estate loans will mature over the next few years. “These assets are going to need new debt, and CMBS is one of the vehicles that helps provide the debt for all these loans that are going to turn over,” Fasulo explained.
Trepp, LLC research analyst Joe McBride also said he expects around $80 billion in CMBS issuance this year. “And we’re going to need it for the onslaught of maturing loans that we’re going to get towards the end of 2014 and in 2015 and 2016, for sure,” he said. McBride noted that fundamentals underpinning CMBS strength include rising property prices, property performances stabilizing or improving, and low interest rates.
Yet, however strong the CMBS market is looking right now, Fasulo recalled that issuance levels in 2006 and 2007 were around $200 billion annually. Issuance dropped to nearly zero in 2009. “I don’t know if we’ll ever get back there (the levels of 2006 and 2007) in the near future,” Fasulo said.
Sam Chandan of Chandan Economics did caution that in order to double CMBS issuance, “there is an expectation that there will be a significant increase in the number of borrowers who meet prevailing underwriting standards.” While it’s certainly the case that a large number of CMBS loans will be maturing in the near future, “not all of those loans will present appealing refinancing opportunities for lenders,” according to Chandan.
Looking at the broader picture, Fasulo observed that all segments of the real estate market are benefitting from the abundance of equity and debt available for investment. “The real estate recovery has really spread out exponentially over the last 12 months,” he said.
Keven Lindemann, director with SNL Real Estate, pointed out that REIT IPO activity this year has included a wide variety of property types. So far in 2013, there have been 11 REIT IPOs generating a total of approximately $3.8 billion, compared with six IPOs in all of 2012 that generated around $1.3 billion, according to SNL data. “Access to capital is really quite good for REITs these days,” Lindemann said.