CBRE Sees Tough Year for Commercial Mortgage Bonds With New Rule

  • Looming regulation is weighing on new issuance: CBRE
  • Banks are filling the gap, even as the OCC flags concerns

A dismal start to the year for commercial mortgage bond issuance is unlikely to get any better as new regulations come into effect, according to CBRE Group Inc.  

Wall Street bankers are still figuring out how to comply with new rules that require issuers to hold onto some of the commercial mortgage bonds they sell. That could continue to hamper sales, which are running nearly 50 percent below last year’s levels, for the remainder of 2016, said Brian Stoffers, global president for debt and structured finance at CBRE, the world’s largest commercial property brokerage. No issuer has yet sold bonds that comply with the rule, which takes effect on Dec. 24.

“CMBS lenders are going to struggle the balance of the year, not only because of the volatile start but also because of the upcoming regulatory changes that are being enacted,” he said by phone. “They’re going to effect the way they do their business. So there’s more change ahead, probably more layoffs ahead, more consolidation ahead.”

Issuance of commercial mortgage bonds has already fallen, having reached $9.5 billion last quarter, the lowest since 2012, according to a report from data provider Trepp LLC. Less than $30 billion of the securities have been sold so far this year, Trepp analysts wrote. Total sales in 2015 were nearly $100 billion.

That decline came after investors sought haven assets earlier this year, and shied away from commercial mortgage bonds and other instruments seen as risky. As borrowing costs soared, issuers grew less interested in selling the debt.

Commercial mortgage bond issuance is not about to vanish but “I don’t think it’s going to boom either,” said Stoffers.

The new securitization rules are known as risk retention, and are designed to prevent banks from making and selling off bad loans by aligning lenders’ interests with their investors. The regulations are required under the 2010 Dodd-Frank financial reform law, and apply in some form to securitizations in general, or debt that gets bundled into bonds and sold to investors.

Issuers and investors just need to settle on conventions for how to structure securities, said CBRE’s Stoffers.

“Once CMBS lenders establish a game plan going forward -- how they’re going to handle the risk retention, how they’re going to handle some of these other regulatory issues -- I think things will stabilize,” he said.