Favorable Pricing as Origination Volume Eases Slightly

  • Despite an increase in short-term interest rates in December, the enactment of comprehensive tax reform contributed to strong investor sentiment. This environment has been favorable to CMBS conduit and private commercial mortgage pricing.
  • With the potential for stronger economic growth in 2018 due to tax reform, many analysts expect up to three additional short-term rate increases by the Federal Reserve this year. Yields on the benchmark 10-year U.S. Treasury have increased by 25 basis points (bps) between the end of Q3 and mid-January.
  • The CBRE Lending Momentum Index fell by 1.2% in Q4 2017. As of December, the index is down 15.9% on a year-over-year basis.
  • CMBS issuance totaled $88 billion in 2017, ahead of 2016’s $76 billion. Spreads on new-issue, 10-year, AAA-rated paper hovered around swaps + 90 basis points (bps) for most of the year, but tightened in Q4. As of early January, spreads compressed to swaps + 75 bps. With fewer maturing loans in 2018, CMBS loan pricing fundamentals should remain favorable.  
  • Combined Fannie Mae and Freddie Mac multifamily loan purchase volume reached a new record of $139 billion in 2017, up from $112.6 billion in 2016.
  • Loan underwriting turned slightly more aggressive in Q4, as average loan-to-value ratios (LTVs) rose while debt yields fell. The percentage of loans carrying interest-only terms rose to 66% in Q4 from 57.8% in Q3.  
  • With significantly lower maturing loan volumes in 2018, the supply/demand balance for lending should continue to result in favorable loan spreads for borrowers. However, there is the possibility that economic growth and inflation may pick up more than expected. Combined with additional Fed short-term rate increases, this could result in a modest upward shift of the benchmark Treasury yield curve.