CMBS issuance in New York could reach $121 billion this year, its highest level since 2007, with office deals helping lead the resurgence, according to data from Trepp and Commercial Real Estate Direct.
Seven of the 20 largest single-asset-single borrower CMBS deals so far this year have included office collateral, according to Trepp. New York represented the largest CMBS office deal of the year. Tishman Speyer secured a $2.65 billion CMBS loan for the Spiral, a 66-story high-end office building in Hudson Yards.
Lonnie Hendry, chief product officer for Trepp, said CMBS is the “perfect marketplace” for the billion-dollar-plus deals.
“You’ve seen some very large deals in that single asset, single borrower cohort in the office sector of New York, where they were able just to do it all in one fell swoop, instead of having to compete with multiple different lenders,” said Hendry in an interview last month.
CMBS has long been New York City office developers’ preferred method to refinance office loans. The financing mechanism, which bundles loans together and sells them to investors, usually offers the cheapest source of financing.
Demand for CMBS financing fell off in 2008 when the property markets crashed during the Financial Crisis. But the market rebounded in the following years thanks to a renewed interest in commercial real estate.
CMBS issuance fell to just $55 billion in 2020, only for it to nearly double the following year to $109 billion.
When the Federal Reserve started to increase rates in 2022, spreads on CMBS loans jumped and issuance declined. But spreads, or the perceived risk of CMBS loans, recently decreased to around 80 basis points as the Federal Reserve moved to cut the Federal Funds rate a quarter of a percentage point.
CMBS office deals are for sure becoming more palatable to investors.
But most of the new issuance is concentrated in single-asset, single-borrower loans, instead of conduit loans, according to Trepp. This shows that investors are being highly selective and not taking bets on the asset class, but rather on a single office building.
Much has been made about the resurgence of the city’s office market and institutional investors’ return to the asset class. But a closer look shows investment is mostly concentrated in hyper-local submarkets such as Grand Central.
CMBS is exhibiting a similar trend. Investment is increasing, but only in select parts of the market.
At the same time, distress is continuing to play out, and CMBS delinquency rates remain at record levels. In August, CMBS office loans had a remarkable 11.66 percent delinquency rate before notching 11.13 percent in September, according to Trepp, which tracks securitized mortgages.
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