Commercial mortgage-backed securities (CMBS) have been doing very well in 2015 as their volume and ultimate popularity go up.
The Richmond Times-Dispatch reports that although interest rates have gone up slightly, CMBS are growing at an impressive rate, surpassing quarter volumes from the past two years.
Interest rates did increase, although that hasn’t stopped the issuance of CMBS. The rates for five- and 10-year loans rose from 3.3% to 3.9%, respectively. The 10-year maximum leverage conduit loans now have 4.3% rates.
Still, the first-quarter volume of CMBS is predicted to supercede its first-quarter volume from last year. The FDIC Quarterly Banking Profile indicates that CMBS lending rose $17 billion in the fourth quarter of 2014 from the third quarter, and rose $41 billion altogether from the fourth quarter of 2013.
CMBS are popular due to their relatively low interest rates, which, unlike other loan deals, can be locked in for up to 10 years. Still, borrowers who want to pay off their CMBS before the 10-year period may face large prepayment penalties. Given that the interest rates of CMBSs are currently lower than they were 10 years ago, the risk of a large penalty is prominent.
The popularity of CMBS reflects a growing trend throughout the country of investing in large commercial property values. Since the economic downturn of 2007-2008, investors have been more reluctant to invest in large lending deals. However, property values of commercial real estate have gone up in many cities throughout the country.
Central business district office properties, in particular, have done quite well. Their property value has increased a staggering 135% since 2009 and are now 19% above the peak property values of 2007, according to a JP Morgan report that referenced data from Moody’s/RCA.
There are an estimated 35 lender/conduit financial institutions that offer CMBS. Given the growth of CMBS and similar investments, financial experts predict there will be even more institutions that offer CMBS in the years to come.