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Commercial Real Estate Monthly Recap – Oct. 2018

Los Angeles – October 31, 2018 – Notable monthly movements in the market include an approximate .10%-.15% widening of spreads for agency loans (~.20% YOY) as well as “A” and “BBB” rated grade corporate bonds (~.22% YOY). The movement in agency spreads is likely due to heightened levels of the supply of bonds in the marketplace, both in Freddie K’s and DUS, while buyers are continuing to be more selective. Benchmark rates continued to widen with 1-month LIBOR up .07% (+.99% YOY), 10-year treausry up .08% (+.68% YOY), 30-year treasury up .16% (+.33% YOY). Upward movement in benchmark rates has been more pronounced over the last 12 months at the shorter end of the curve.

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Alice EricsonCommercial Real Estate Monthly Recap – Oct. 2018
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Commercial Real Estate Monthly Recap – Sept. 2018

Los Angeles – September 30, 2018 – The level of commercial/multifamily mortgage debt outstanding increased by $52.3 billion in the second quarter of 2018 as all four major investor groups increased their holdings. That is a 1.6 percent increase over the first quarter of 2018, according to MBA’s latest Commercial/Multifamily Mortgage Debt Outstanding report. Total commercial/multifamily debt outstanding rose to $3.27 trillion at the end of the second quarter. Multifamily mortgage debt outstanding rose to $1.3 trillion, an increase of $20 billion from the first quarter of 2018. The balance of mortgage debt on commercial and multifamily properties grew faster during the first half of 2018 than during any other first half since 2007. The four major investor groups all increased their holdings. Agency and GSE Portfolios saw the largest increase (2.4%), followed by life insurance companies (2.2%), banks and thrifts (1.9%), and CMBS, CS and other ABS issues (1.3%). Strong property fundamentals and values, coupled with still-low mortgage rates and strong loan performance, are all supporting the market.

Of note, there was an approximate 20 basis point increase this month in the 5, 7 and 10 year Treasury, which is significant. The change from one year ago is approximately 75 basis points. The recent interest rate movement may exert downward pressure on spreads in the short term as lenders compete aggressively for business to end the year.

Conduit issuance was light in September with only 3 deals pricing for a total of $3.24b, bringing the YTD conduit total to $28.57b across 31 deals. Two of the deals priced relatively close to one another, while the third deal priced wider based on perceived weaker sponsorship. AAA LCF priced from S+78-85, with two deals at 78 and one at 85. The AA- priced in a range of S+115-130, with the A- ranging from S+145-185. The SASB space was also quiet with only 4 deals pricing, all of which were floating rate and totaled only $1.288b. Additionally, 2 CRE CLOs priced for a total of $641mm.The real star of the show this month was the secondary market, which was particularly active this month as bonds traded both in comp and behind the scenes. We saw everything from AAA tranches down to below investment grade bonds trade, with all tranches ending the month tighter. AAA LCF bonds started to trade a little heavy in the last two days of the month after heavy selling leading into quarter end. Even with the month end widening though, they still managed to tighten around 5 bps on the month. AA- bonds ended the month tighter by 5-10bps, with A- bonds closer to 10-15bps tighter. BBB- bonds outperformed again this month, with spreads 20-30 basis points tighter.

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Alice EricsonCommercial Real Estate Monthly Recap – Sept. 2018
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Commercial Real Estate Monthly Recap – Aug. 2018

Los Angeles – August 31, 2018 – The Mortgage Bankers Association (MBA) released their Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations for the second quarter of 2018, showing commercial and multifamily mortgage loan originations were four percent higher than during the same period last year and 32 percent higher than the first quarter of 2018. Borrowing and lending continues to track with last year’s level. Investor demand for multifamily properties and hotels are helping push originations higher, even as loan demand for retail properties is down. New loan demand continues to be supported by still-low long-term interest rates, growing property incomes, and rising values. A rise in originations for hotel and multifamily properties led the overall increase in commercial/multifamily lending volumes when compared to the second quarter of 2017. The second quarter saw a 22 percent year-over-year increase in the dollar volume of loans for hotel properties, a 17 percent increase for multifamily properties, a one percent increase for retail properties, a four percent decrease for office properties, a 10 percent decrease in industrial property loans, and a 16 percent decrease in health care property loans. Among investor types, the dollar volume of loans originated for the Government Sponsored Enterprises (GSEs – Fannie Mae and Freddie Mac) increased by 18 percent year-over-year. There was a six percent year-over-year increase for life insurance company loans, a one percent decrease in commercial bank portfolio loans, and an eight percent decrease in the dollar volume of Commercial Mortgage Backed Securities (CMBS) loans. Second quarter 2018 originations for hotel properties increased 89 percent compared to the first quarter 2018. There was an 87 percent increase in originations for retail properties, a 36 percent increase for office properties, a 25 percent increase for multifamily properties, a 9 percent increase for industrial properties, and a 9 percent decrease for health care properties from the first quarter 2018.

Conduit issuance was generally light in August with 4 deals pricing for a total of $2.88b, bringing the YTD conduit total to $25.33b across 28 deals. While last month’s deals were all issued off relatively high quality shelves causing the range of prints across the stack to be relatively narrow, this month’s deal prints showed a much wider dispersion. The AAA LCF priced in a range of S+86-91, with the AA- ranging from S+125-140 and the A- ranging from S+165-200 (versus 150-160 last month). The non-conduit space was also relatively quiet with only 5 SASB deals pricing for a total of $1.7B. Of this issuance, $1.34b was floating rate (across 4 deals), while the remaining $365mm (1 deal) was fixed. One CRE CLO also priced for $285mm. In the secondary market, AAA LCF bonds tightened by 2-4bps, with the rest of the stack continuing to benefit from the lack of supply, particularly in the last 3 weeks of the month, since all four conduits priced by August 10th. Secondary mezz continues to trade through primary for most deals, with AA- bonds tighter by 3-5bps and A- bonds tighter by 5-10bps. While overall trading volume was lower in August, the BBB- space was relatively active as faster money and total return accounts looked to take profits. Even with the elevated selling, BBB- bonds outperformed again in August, with bonds tightening anywhere from 15-25bps.

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Alice EricsonCommercial Real Estate Monthly Recap – Aug. 2018
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Commercial Real Estate Monthly Recap – July 2018

Los Angeles – July 31, 2018 – According to CBRE’s Q2 2018 U.S. Lending Figures reports, although lower loan maturity volumes have resulted in less originations this year, the commercial mortgage market remains in good shape overall. With an additional short-term policy rate increase by the Federal Reserve in June, the yield curve has continued to flatten. As of mid-July, the spread between 10-year and two-year Treasury bonds was only 25 bps—the tightest level since before the 2008 recession, when the yield curve inverted. Q2 lending volume, as measured by the CBRE Lending Momentum Index, was even with Q1 levels. Compared to a year ago, however, the index is down 10.6%. Agency multifamily lending is quite active. Year-to-date through May, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $43 billion, not far off the record-setting pace of $44.6 billion for the same period in 2017. Overall debt service coverage and LTV ratios in Q2 were consistent with the prior quarter. The percentage of loans carrying interest-only terms was 61%, down 5 percentage points from Q1. According to CBRE, there has been no substantial deterioration in loan underwriting measures over the past several quarters.

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Alice EricsonCommercial Real Estate Monthly Recap – July 2018
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Commercial Real Estate Monthly Recap – June 2018

Los Angeles – June 30, 2018 – Life insurance companies and pension funds, as part of their overall investment portfolios, hold $475 billion in commercial and multifamily mortgage debt, accounting for 15 percent of the total outstanding. In 2017, life companies lent $80 billion in commercial and multifamily mortgages – a new record and four percent above 2016 levels – growing their portfolios by $40 billion or 9 percent. The long-term nature of commercial and multifamily loans matches well with the long-term nature of many of the liabilities off these companies. And like other capital sources, commercial and multifamily mortgages have performed extremely well for life companies. For most of the past decade-and-a-half, 60+ day delinquency rates have been below 10 basis points. At the end of 2017, just .03 percent of the balance of loans held by life companies were delinquent – 17 out of 33,236 loans.

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Alice EricsonCommercial Real Estate Monthly Recap – June 2018
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