A trio of recent reports offer insight into the current state of the commercial mortgage market. One indicates that quarterly commercial originations were up by more than a third, while another points to a marked increase in projected production.
Commercial mortgages originated during the second quarter were up 36 percent from the first quarter in the Mortgage Bankers Association’s Commercial Real Estate/Multifamily Finance Quarterly Data Book. Production was up nearly 2 percent from a year ago.
Still, MBA Vice President of Commercial Real Estate Research Jamie Woodwell recently called second-quarter demand for commercial mortgages “weak.”
But another organization sees growing strength ahead for commercial mortgage originations.
In a report released Thursday, Standard & Poor’s Ratings Services said credit spreads on commercial mortgage-backed securities have been improving since peaking in the first-quarter 2009. The report, U.S. CMBS Issuance Could Rise Significantly In 2011, was published by S&P’s global structured finance research team.
The tightening spreads are continuing to generate new issuance over the short term.
Based on the current pipeline of CMBS transactions, between $4 billion and $8 billion in CMBS issuance is projected during the fourth quarter — the highest quarterly volume since early 2008. The wide margin in the forecast is the result of uncertain timing for the transactions.
Next year, S&P predicts issuance could reach $35 billion as long as the yield on the 10-year Treasury remains low. Its estimate was impacted by an expected increase in commercial mortgage originations by existing lenders and the entry of several new players.
“While $35 billion may seem high relative to the amount of issuance during the past two years, it would roughly equate to the levels we saw in 1996 and 1997,” the New York-based firm said. “Furthermore, we believe that several of the new financial regulations — e.g., the Dodd-Frank Act, the SEC’s Regulation AB II, and Financial Accounting Standards Board FAS 166 and 167 — should be only a minor impediment to new CMBS issuance.”
S&P also pointed to the maturation of an estimated $40 billion in fixed-rate CMBS. In addition, another $300 billion in non-securitized commercial mortgages are set to mature.
“This rollover could provide opportunities for CMBS lenders to increase their loan origination volume,” S&P said.
Commercial mortgage debt outstanding fell to $3.2432 trillion in the second quarter from a revised $3.2950 trillion three months earlier, according to MBA’s study on commercial mortgage and multifamily debt outstanding. The report was based on an analysis of Federal Reserve Board Flow of Funds data.
MBA previously reported commercial mortgages outstanding of $3.4671 trillion as of June 30, 2009.
Commercial banks held 45 percent of the latest outstandings, followed by 20 percent held in securities and 10 percent held in agency and GSE portfolios and MBS. Life insurance companies owned 9 percent of commercial mortgages, while 6 percent were held by savings institutions.
Included in the June 30 total was $0.8430 trillion in multifamily mortgages, edging down from $0.8484 trillion three months prior and falling from $0.9143 trillion a year prior.
The biggest chunk of multifamily loans — 37 percent — were held in agency and GSE portfolios and MBS. Commercial banks owned a quarter of apartment loans, and another 13 percent were securitized.
Woodwell noted that outstanding agency portfolios were an exception to the overall decline in outstandings.
