The Changing Landscape of the CMBS Market

September 27, 2018

Source: J.P. Morgan Source: J.P. Morgan

Since the financial crisis began 10 years ago, the composition of the commercial mortgage-backed securities (CMBS) market has changed. Based on data from J.P. Morgan, the outstanding balance of private-label conduit CMBS securities declined by $355 billion between 2008 and 2018. During the same period, the balance of agency (Fannie Mae, Freddie Mac, and Ginnie Mae) multifamily securities increased by $365 billion.

Agency CMBS securities are issued by the Government Sponsored Enterprises (GSE), where the underlying assets are predominately multifamily properties. These securities are backed by the agency’s guarantee of the timely payment of interest and principal. 

Since the great recession, multifamily has been among the strongest property types in terms of fundamentals, as measured by property price appreciation, rent growth and vacancy rates. Agency CMBS currently represents 45.4% of total CMBS outstanding, up from 7.6% in 2010. Prior to the financial crisis, most multifamily loans were financed through conduit deals with a specially designated class. 

The balance of conduit CMBS outstanding has been shrinking in recent years as the heavy supply issued between 2005 and 2007 has been largely paid down. While the lending environment has been healthy, issuance volumes of conduit CMBS are down significantly from their peak. 

Commercial and multifamily real estate borrowing and lending continues to track last year’s level. According to the Mortgage Bankers Association, second quarter 2018 loan originations were four percentage points higher than during the same period last year and 32% higher than first quarter 2018. The dollar value of loans originated for Government Sponsored Enterprises increased 18% year-over-year.


Key Takeaway

CMBS supply projections for 2018 are expected to track last year’s levels. I expect agency CMBS issuance to remain strong with no signs of slowing. Agency CMBS has brought stability and variety to the private label CMBS market, as their spreads are typically more stable during periods of market volatility when risk premiums widen. The agency CMBS market remains liquid and has gained popularity since the inclusion in the Bloomberg Barclays U.S. Aggregate Index in 2014. Opportunities may exist for investors seeking highly-rated guaranteed investments relative to other alternatives with higher beta risk.


Tags: CMBS | Financial crisis

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