“What we’re seeing is that a lot of the bank balance sheets are having capacity issues and they are being extremely selective on what they want to take on.”
– Michael Cohen, Brighton Capital Advisors
The fourth quarter is historically the busiest quarter for commercial MBS issuance, and this year the trend should continue based on deals currently in the pipeline, according to Kroll Bond Rating Agency. The rating service said as many as 20 deals could launch in October, including 10 small-balance transactions, six conduit offerings, three commercial real estate collateralized loan obligations and one Freddie Mac deal.
However, KBRA cautioned that new issuance could slow if Congress is unable to come to a comprise on a new funding bill. “If the government shut-down drags on, it could bring uncertainty and volatility to the markets, which could temper this momentum,” it said.
Still, Michael Haas, CEO of Cred IQ, a commercial real estate market analytics firm, said he expects CMBS issuance in 2025 to be higher than in 2024. CMBS issuance last year came in at $216.44 billion, according to Inside MBS & ABS.
Haas noted that it’s been a strong year for CMBS of all asset types except office space, which has experienced a wave of maturity defaults.
“Office is the weak link, but all the other property types are holding office up,” he said.
Haas noted that a flurry of new deals were added to the pipeline shortly after the Federal Reserve announced a 25-basis-point interest rate cut at the end of September. He noted that expected rate cuts by the Fed in the fourth quarter should also generate additional issuance before the end of the year.
Michael Cohen, a managing partner at Brighton Capital Advisors, told this newsletter that strong investor demand for CMBS has been aided by cautious underwriting for CRE loans.
“What we’re seeing is that a lot of the bank balance sheets are having capacity issues and they are being extremely selective on what they want to take on,” Cohen said.
He added that the best time to buy CMBS bonds is when loan originators are more conservative and less risk tolerant. “These are quality vintages,” he said.
