Commercial mortgage-backed securities issuance has bounced back after a brief slowdown stemming from uncertainty over the Russian invasion of Ukraine, with $4 billion of new issuance last week.
“The second week of the war really put a pause in the debt markets. We saw spreads really gapping out significantly, and a handful of deals in our world were put on hold,” Raj Aidasani, a senior researcher at the New York-based industry group, CRE Finance Council.
But this trend was reversed last week, when new issues started to come to market again and the consensus among market participants is that even with the slowdown, 2022 issuance is outpacing 2021’s run. Last year, the market saw $110 billion of new issuance, the most active year since the record-breaking $270 billion seen in 2007.
“To give some perspective, for overall issuance, we’re at around $39 billion. At this point last year, we were at $17 [billion],” Aidasani said.
Not out of the woods
The impact from the Russia-Ukraine conflict could still disrupt the commercial real estate debt in several ways, although US lenders and borrowers have little or no direct exposure to these markets.
Market participants noted that if Russia were to default on its sovereign debt, it would send ripples throughout the bond market, even domestic CMBS. And as the current energy shortage further inflames inflation, the Federal Reserve could ramp up its rate hikes and taper asset purchases quicker than expected, reducing the liquidity.
“Inflation going even higher might put a pause on the US economy overall and could slow us down significantly. And that is a bigger concern because if that happens, you’re not going to have companies signing leases,” Aidasani said.
The Federal Reserve, as expected, raised interest rates by 25 basis points last week. Yet, Chairman Jerome Powell signalled that there could be up to five more rate hikes this year, and they might be larger than initially projected.
Until the picture on interest rates and inflation get clearer, the future of CMBS issuance will remain murky.
“It’s going to be really interesting what Powell decides to do. It’s a quarter point this time but the path thereafter has so many variables for him,” Aidasani said. “He has to walk that fine line without really hurting growth too much.”
Waiting for the other shoe to drop
An unexpectedly large interest rate hike is just one of the many market disruptions the CMBS market could face in the next few months. And how large players prepare for such a disruption may be more important than the event itself.
“Everybody’s still thinking, ‘Who is that bank that’s going to be on the wrong side of an interest rate trade, an oil trade, a commodities trade?’ And that’s the other shoe that could drop,” said Manus Clancy, a senior director at Trepp.