Buy-side resistance is causing commercial MBS lenders to dial back their originations of retail mortgages.
Loans on shopping centers and malls have accounted for just 22% of the total collateral of U.S. securitizations so far this quarter, down from 29-33% over the four quarters of last year.
Counting only multi-borrower transactions, the concentration of retail mortgages has fallen to 26% this quarter, from a range of 31-37% last year.
CMBS issuance this year is running behind the 2013 pace, so the decline in the share of retail mortgages reflects an actual decrease in the volume of securitized retail loans. The $3.3 billion of retail-loan securitizations since the start of the year is on track to be the lowest quarterly total in two years.
To be sure, the sample for this year is relatively small, and some conduit transactions have bucked the pattern. For example, the $957.6 million JPMBB 2014-C18 transaction that priced last month had a whopping 51% retail concentration. But CMBS lenders said the trend is clear and reflects pushback by bond buyers wary of retail paper unless it’s backed by high-quality properties.
The resistance was first seen on single-borrower transactions. In 2011 and early 2012, as the CMBS revival took hold, retail mortgages accounted for more than half of the collateral in single-borrower deals backed by loans originated in advance of securitization. But last year, retail loans made up just 29% of single-borrower collateral, and the figure has slipped to 8% this year.
Now investors are also pushing for lower retail-mortgage concentrations in conduit deals. And issuers are responding, out of fear that failing to do so might hurt pricing.
Some of the slack has been taken up by multi-family originations. About $2.6 billion of multi-family loans have been securitized this quarter, accounting for 17.5% of total securitized loans. That’s the largest quarterly percentage since the market revival and well above the quarterly concentrations of 3-12% last year. In part, that reflects the improved competitive position of private-sector apartment lenders after the government last year mandated a pullback by Fannie Mae and Freddie Mac.
But CMBS shops said the shift in concentration levels generally reflects a conscious decision to scale back retail-mortgage originations, rather than an emphasis on increasing multi-family lending.
Retail troubles have rattled the markets for years — Best Buy, Barnes & Noble, JC Penney and Sears have all seen a rocky period of store closings and declining sales. But the investor pushback picked up steam late last year.
Why? “Because investors are concerned about the competitiveness on the lending side now,” said one veteran buysider. “We know what happens when the issuers have to compete more aggressively to win loans — credit quality slips. They start to go after third-tier malls and other riskier assets. The investors have had to draw the line. Otherwise the lenders will try to get away with whatever they can.”
The resistance is targeted at lower-quality properties. Investors still embrace premier malls, grocery-anchored retail centers and shopping centers with high-performing retailers, like Apple and Lululemon.
“There are some ‘gateway’ malls that investors are always going to like,” said one CMBS lender. “When you see a top-tier mall in an affluent community like Westchester County, for instance, they’re going to welcome that kind of a loan. It’s the B-malls in the middle of the country that people are wary of. They’re going to have a harder time surviving.”
“Retail is the new ‘hotel’ of CMBS,” said one securitization group head. “The buyers are starting to approach retail the way they have handled hotels since the crash. They like some, but they’re careful to distinguish the good hotels from the less good, and they will accept having some hotel loans in a pool, but not above a certain threshold. That’s what has happened now with retail.”
CMBS shops have long been the “lenders of last resort” for secondary- and tertiary-market shopping centers that insurance companies and banks won’t touch. But if CMBS shops continue to shy away, owners may be hard-pressed to refinance marginal retail properties. There’s a heavy volume of debt maturities slated for 2015-2017, as 10-year loans written during the 2005-2007 CMBS peak come due.
“You’ll definitely see some retail guys who can’t get enough proceeds to take out their old loans,” said one conduit lender, “and some of them will have to line up mezzanine debt or preferred equity, or bring in new partners. Others will get bridge loans. But I think we’ll definitely see more retail changing hands.”
Ann Hambly, who runs 1st Service Solutions, a Dallas advisory shop that works with CMBS borrowers, agreed that many retail-property owners will have a tough time refinancing over the next few years.
“I tell them to come and talk to me a full year ahead of their debt maturity, because dealing with special servicers is a time-consuming process,” she said. “I say, if you can get out of the debt at maturity, do it. If you would be able to get out of it in a few years by putting in a little bit of extra money, do that. And if you can’t see getting out of the debt within two or three years, then you might as well face the music now.”
“Commercial Mortgage Alert,” March 2014