With major banks reducing their involvement in commercial real estate lending, CMBS (Commercial Mortgage-Backed Securities) is making a significant comeback by adapting to current market conditions, as reported by the Commercial Observer.

Rebound: CMBS issuance has seen a remarkable resurgence, with U.S. private-label CMBS issuance reaching $32.2 billion in the first five months of 2024, compared to just $13 billion during the same period in 2023. The first quarter of 2024 alone recorded $12.2 billion in CMBS issuance, a substantial increase from $2.7 billion in the first quarter of 2023. This recovery follows a downturn in 2023, where conduit CMBS issuance fell by 27% and SASB (Single Asset, Single Borrower) CMBS issuance dropped by 73%.

Trending: Investor interest in CMBS is also on the rise, with $24.6 billion in new securities purchased year-to-date through May 2024—nearly triple the amount bought in the first five months of 2023. This renewed interest is largely driven by the cost of capital, as CMBS loans often offer cost savings of up to 25 basis points compared to other financing options.

Between the Lines: The Federal Reserve’s interest rate hikes have further pushed borrowers towards CMBS. With the fed funds rate at 5.5% and the 10-year Treasury note at 4.62%, the compressed spreads on CMBS products—131 basis points over the 10-year Treasury for AAA-rated tranches—make them more attractive.

Not Without Challenges: Despite its benefits, CMBS financing does come with challenges, particularly in distressed situations. The involvement of special servicer often leads to delays and conflicts of interest. This was evident in the case of 1740 Broadway in Manhattan, where a defaulted $308 million CMBS note resulted in significant losses for junior bondholders.

The Takeaway: CMBS financing is crucial as it now constitutes 14% of all U.S. commercial real estate lending. The recent banking crisis, marked by the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, has caused commercial banks to retreat from CRE lending. In 2023, dedicated commercial lenders closed $306 billion in CRE loans, a 49% decrease from 2022’s $595 billion. CMBS is stepping in to fill this liquidity gap, with major institutions like Goldman Sachs, Bank of America, and Wells Fargo at the forefront.