Why CMBS is Growing More Attractive For Investors

While CMBS issuance remained extremely light throughout 2022 and 2023, this year has seen it strongly return to favor, according to the speakers on a video panel centered on why the CMBS market is an attractive solution right now for financing and investment.

The talk was moderated by Bonnie Neuman, partner at event sponsor Cadwalader, Wickersham & Taft LLP, and also featured Joseph Geoghan, head of origination at JPMorgan Chase, and Rene Theriault, managing director at KKR.

Geoghan started off the discussion by discussing the rise of CMBS in 2024.

“When a deal came to market in 2022 and 2023, everybody could pick over it. It was a completely different market than we have today,” said Geoghan. “In 2024, we have a ton of issuance coming out. At any given moment, there are three, four, five deals in the market.”

Geoghan cites the variety and flexibility of CMBS as one of the drivers of its current popularity.

“If you look at the way we tranch our deals, people have the opportunity to buy the top, middle, or bottom of the cap stack,” said. “So you can look for the risk/reward that works for whatever you’re trying to accomplish. You can buy a AA risk, or subordinate debt. AAA bonds could be 150 over SOFR, whereas the bottom of cap stack could be 600 or 700 over SOFR, so you can pick your spot within the CMBS capital stack. You can pick what part of the country you want to invest in, or within what asset class. I think that’s one of the things that makes it attractive for investors.”

Theriault agreed, with an emphasis on the SASB market.

“We’re able to make loans or invest in credits at lower LTVs, higher debt yields with more structure, and at higher returns than we were able to previously,” said Theriault. “The SASB market is the highest quality real estate, the best sponsorship, and it’s really financed. Being able to invest in that on a deal-by-deal basis, at the risk layer you want, is very attractive.”

Theriault noted that KKR has been the largest purchaser of B-piece buyer risk retention since its 2017 implementation, finding it to be a very attractive market.

He also mentioned KKR’s belief that the conduit market will grow over time due to the widespread pullback of regional banks.

“Regional and big commercial banks have been 40% of the CRE lending market over the years,” said Theriault. “As banks have pulled back due to real estate exposure on their balance sheets, we think that creates a big opportunity for the conduit market, and that the SASB market is really the only place you can finance those types of larger deals. But we think both the securitized market and alternative lenders will benefit from the bank pullback, and obviously we’re very focused on the securities markets.”

Geoghan mentioned that this year, there has been a growing separation between those two markets.

“If you go back to last year and look at what’s getting financed, there was $40 billion of issuance with $20 billion SASB and $20 billion conduit. This year, we’re already at all of last year’s production, but at $30 billion SASB and $10 billion conduit,” said Geoghan. “The SASB market is predominantly industrial, hotel, and some storage and multi, whereas the conduit market is predominantly retail and office.”

Geoghan also noted that given the run-up in treasury, the past few years have seen a reduction in the number of borrowers seeking 10-year, fixed-rate paper, with the conduit market preferring five-year fixed rate, and SASB market favoring a floating rate environment.

Later on, the speakers turned their attention to a discussion of asset classes.

“Right now, the SASB market is 35% industrial and 30% hotel,” said Geoghan. “We’re starting to see multi-storage, malls, and a little bit of office. There’s a little bit of fluctuation in spreads in industrial, but by and large it’s fairly stable, as is hospitality.”

He also noted that opportunities exist as well in “harder-to-finance” asset classes.

“If you are pursuing a trickier office situation or something that’s a bit esoteric or bespoke, there’s an opportunity for investors to get more spread, and invest more time in the underwriting,” said Geoghan. “We’re on the floating rate side in the mid-100s. If you go after something a little bit more bespoke, maybe you could see 200 or 200 and change. But for the most part, industrial and hotel seem to be pretty down the middle.”

While the industrial sector has seen some flagging in demand of late, Theriault said that KKR remains bullish on the sector.

“There has been some increased supply that is still being absorbed in some markets that’s caused some rents to maybe plateau a little bit, and not grow at the pace they were growing before,” said Theriault. “But we still really like the industrial sector. We still think it has real tailwinds in terms of onshoring and the way that retail has migrated to e-commerce. So we really like industrial-multi.”

Theriault also discussed other favorable asset classes of late, including what he considered the “hidden gem” for investors.

“The hidden gem in some of this has been grocery-anchored retail,” said Theriault. “The very average sort of neighborhood centers and grocery-anchored centers have been stronger than they had been for years, and have really recovered a lot post-COVID. Also, we all went through that huge COVID shock where hotel and retail were really uninvestable for a period of time, and they have really come back a lot.”

The upshot to all this is that on the heels of an economic downslide, there is growing activity in the market, and hopes that this growth will continue.

“We are seeing some transactions occurring in the market. There was a large take-private announced earlier this year,” said Theriault. “So I think we’re starting to see more acquisition activity, and we’ve seen that particularly in the conduit. We’ll see more of it, but it takes a while for that value reset to happen, because that’s really what’s been going on. The dramatic increase in interest rates has had an impact on values, and it’s taken awhile for that to flow through the system.”