Commercial Real Estate Debt: Anticipating a Strong Fourth Quarter

While year-to-date sales volumes lag last year’s totals, originations continue at a strong pace.

November 14, 2017

This Commercial Real Estate Debt sector report is excerpted from the Fourth Quarter 2017 Fixed-Income Outlook.

Sales continue to lag last year’s volume by approximately 7 percent through the third quarter. With the decline in sales, logic and history would indicate that originations would generally correlate to this trend. However, originations have exceeded last year’s first-half totals and market participants believe that third-quarter volumes will surpass those of the second quarter. While banks have significantly reduced originations in the first half, other lenders have increased their appetites, particularly Agency and CMBS lenders. New supply has come to the market from a variety of sources, including the refinancing of the end of the wall of maturities from 2007 and new construction projects on apartment, industrial, and office buildings that, due to robust leasing and stabilized cash flows, have easily converted to permanent loans. Recent sales have also seen an increase of almost 30 percent in August over July and a slight increase from the second quarter to the third quarter, mostly due to a resurgence of portfolio transactions. This increase in larger transactions can be directly attributed to the continued recovery in the CMBS market, and the ability to efficiently finance these larger transactions. If sales continue to rebound—and they usually do in the fourth quarter—the volume of originations may be closer to last year’s totals than previously anticipated. While overall values may have peaked, lenders continue to be bullish on commercial mortgages due to continued low interest rates, solid economic growth, a significant reduction in new development projects, and continued purchases from foreign investors. We see this as likely to boost fourth-quarter sales and originations.

Commercial Real Estate Sales Volumes Remain Below 2015 Peak

Sales volumes fell from their peak in 2015, but third-quarter sales have increased over the second quarter, and there are signs that the fourth quarter may see another increase as portfolio sales are starting to pick up.

Commercial Real Estate Sales Volumes Remain Below 2015 Peak

Source: Real Capital Analytics, Guggenheim Investments. Data as of 9.30.2017.

Cap rates have inched higher from historical lows in all sectors except industrial. However, positive net operating income growth has held valuations steady, and commercial real estate prices posted a soft 1.1 percent increase in the third quarter, according to Green Street Advisor’s U.S. Commercial Property Price index.

With CMBS, Agency, and life company lenders quoting aggressively on 10-year terms, we like five- and seven-year paper, and longer terms up to 15 years where pricing is less competitive. The bridge and mezzanine space is still attractive, especially as Libor has increased significantly from the beginning of the year and borrowers are more willing to look at 4.5–5.5 percent fixed rates for these transactions on three- to five-year terms.

Origination Volumes Remain Strong in 2017

The pace of originations has not declined, despite a slowdown in the volume of sales for 2017. New product, especially for apartments and maturing loans, makes up the difference.

Origination Volumes Remain Strong in 2017

Source: Mortgage Bankers Association: Commercial/Multifamily Quarterly Databook Q2 2017.

—William Bennett, Managing Director; Ted Jung, Vice President

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. ©2017, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


The Fed's Strategic Play: Closing the Chapter on Its Credit Facilities - Featured Perspectives
June 10, 2021

The Fed's Strategic Play: Closing the Chapter on Its Credit Facilities

Examining the Fed’s announcement to sell its SMCCF holdings.

In the Recovery Phase of the Credit Cycle - Featured Perspectives
May 13, 2021

In the Recovery Phase of the Credit Cycle

Strong earnings growth, low default volumes, upward rating migration, and tighter spreads in the recovery phase of the credit cycle.

A Successful Green New Deal Will Need Private Partners - Featured Perspectives
March 25, 2021

A Successful Green New Deal Will Need Private Partners

A Green New Deal should not be viewed as a big government program, but as an opportunity to reinvent vast swaths of the U.S. economy while pursuing the laudable goal of carbon neutrality.


Fixed-Income Outlook 

First Quarter 2021 Fixed-Income Outlook

Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share their outlook for the first quarter 2021.

The Long Road to Recovery 

The Long Road to Recovery

Scott Minerd, Chairman of Investments and Global CIO, discussed his outlook for markets and the economy with CNBC’s Brian Sullivan during the Milken Institute 2020 Global Conference.