CoStar Money: Single-Loan Bond Offerings Return to Pre-Pandemic Stride

CoStar Money: Single-Loan Bond Offerings Return to Pre-Pandemic Stride

Private commercial mortgage-backed security deals with single loans made a strong comeback in October, rebounding to a level not seen since February before the coronavirus pandemic.

Bond investors have been turning recently to these deals backed by loans on a single asset or to a single borrower, often called SASB deals, to counter the ongoing economic disruption caused by the health crisis. Such deals tend to be less complex and include easier-to-assess financials. And last month’s spike was also driven by a desire to complete new offerings before more potential uncertainty could arise from outcomes of this week’s general elections.

While the one-month spike may not get the CMBS market fully back to last year’s average monthly volume and annual total, it was enough for CMBS analysts to raise their forecasts for this year.

CMBS issuance of privately offered SASB deals and publicly offered conduit deals — those deals backed by pools of multiple loans — totaled nearly $6.3 billion in October, according to CoStar data.

The October total included 10 SASB deals totaling $4.7 billion, which was three times higher than just two multiloan conduit offerings totaling $1.6 billion.

That more SASB deals were issued relative to conduit wasn’t the real surprise, John Sim, an analyst with J.P. Morgan Securities, told CoStar in an email.

Underwriting for SASB deals is more stringent, Sim said. SASB deals also tend to involve higher-quality trophy assets with more transparent financials.

The surprise to Sim and his J.P. Morgan colleague Chong Sin was the number of SASB deals issued. In September, the industry consensus was that there would be about $5 billion in deals. And the October number exceeded that by more than 20%.

“In hindsight, it made sense that a lot of these deals were done before the elections as to avoid any potential market volatility and poor execution,” Sin said. “We just didn’t realize so many deals were in the works.”

Sim and Sin upped their forecast for annual volume based on the strength of October deals.

They now expect $55 billion to $60 billion gross issuance for 2020, up from their previous forecast of $48 billion, which includes $28 billion for conduit and $19 billion for SASB, with the rest coming from other types of commercial loan securities.

Where SASB deals have been on the rise, CMBS deals backed by multiple loans have been in decline and are likely to continue to be through year-end, John Levy, president of John B. Levy & Co., a real estate investment bank that specializes in equity and debt placements and structured capital financing, told CoStar in an interview.

“There is a price discovery problem going on in the market right now because there are a lot less deals getting done,” Levy said. “Most people don’t know what properties are worth.”

And that uncertainty is dragging down the conduit CMBS market, those securitizations that roll up multiple loans backed by multiple properties with multiple tenants to multiple borrowers from multiple lenders.

Because there are fewer transactions, there are fewer conduit deals coming to market. And that creates pricing uncertainty for bond investors right now as well as their ability to price the risk in deals, Levy said.

Whether the rebound can hold is uncertain, according J.P. Morgan’s Sim. The outcome of the elections and the lingering effect of COVID-19 will likely continue to provide uncertainty to the CMBS market.

“On the other hand, if volatility stays subdued approaching year end (post-election), we could see a busier-than-usual December pipeline, bringing the [fiscal year] issuance volume closer to the upper end of our forecast range,” Sim said.

Going into November, there were two SASB being premarketed: Grace Trust 2020-GRCE backed by a $750 million loan on the Grace Building at 1114 Avenue of the Americas in New York City owned by a joint venture of Brookfield Properties and The Swig Company; and Citigroup Commercial Mortgage Trust 2020-420K, backed by a loan on a multifamily office property at 416-420 Kent Ave. in Brooklyn, New York, owned by Spitzer Enterprises.