The Morgan Stanley analysts wrote that the rally in triple-A CMBS spreads, which has run since February 2016, is the longest the market has ever enjoyed — but is nearing a turning point.
Triple-A spreads are approaching historic tights relative to the risk free rate, while junior debt spreads are close to post-crisis tight levels. This comes despite growing signs of weakness in the commercial real estate market, such as idiosyncratic risks popping up in CMBS loans as well as softening equity sentiment in real estate investment trusts.
“This, coupled with corporate spreads moving wider and the equity rally showing signs of exhaustion, leads us to view the risk-reward as skewed to the downside,” wrote Richard Hill in the note on Monday.
The analysts recommended shorting CMBX to hedge against underperformance. But with that said, the Morgan Stanley analysts said that CMBS could still outperform corporate debt on a relative basis, while the boom time lasts.
Against this background, primary market activity has been on a tear compared with last year — year to date $22.8bn has been priced across the CMBS market, compared with $11.9bn by the same point last year.
Only two new conduit deals have been priced so far this month: CGMT 2018-B2 and WFCM 2018-C43. The 10 year senior notes on those deals were priced at 78bp and 76bp over swaps, respectively, off the year low of 66bp seen in February before market volatility knocked spreads slightly off course.
Two more are in the pipeline this week: UBSCM 2018-C9 and GSMS 2018-GS9.
One CMBS investor said that the pipeline for new deals is busy, and as such, issuers may struggle to tighten pricing inside a recent range.
“There’s a bunch of conduit deals that are aiming for around 70bp, but I think they will come wider than that,” she said. The 12 month rolling average is 88bp, according to a Kroll note last week.
A large part of the supply pressure is being coming from the single asset/single borrower market — eight deals have come through the pipeline in March. All have priced senior triple-A funding in a range of 70bp-80bp, with the exception of a Credit Suisse deal that was backed entirely by retail exposures, which was priced at 110bp.
The latest single borrower deal to hit the market is from Blackstone, which is looking to refinance the Willis Tower in Chicago, just one year after securitizing a $1.02bn loan on the property in CST 2017-SKY.
The credit fund is squeezing an extra $260m out of the property in the new $1.26bn BBCMS 2018-TALL deal, through Barclays and Deutsche Bank. Drexel Hamilton has also been named as a co-manager.
That Blackstone is back refinancing the property just one year after the last deal is a sign of the rally that the CMBS market has enjoyed. Since the building was last refinanced, triple-A spreads on series 10 of the CMBX index have dropped from about 90bp to close to 50bp.