High five
The first bond backed by a pool of five-year fixed-rate commercial mortgages opened a new door for issuers in 2023 in a sector confronting high interest rates and rising delinquencies.
In essence, the US$679m offering – called FIVE 2023-V1 Mortgage Trust – created a new funding channel to compensate for the fact that economic uncertainty was making the more common 10-year conduit format much less tenable.
“The innovation of the year is the five-year conduit deal,” said Barclays head of CMBS finance Larry Kravetz. “It’s been a great product for the industry,” which otherwise could lose its competitiveness relative to banks and other commercial real estate funding sources.
Barclays was one of the joint bookrunners along with Deutsche Bank, which structured the deal, BMO, Citigroup and Goldman Sachs.
The groundbreaking deal printed on February 10, and by the end of 2023, the five-year conduit market totalled US$7.8bn, accounting for half of all conduit CMBS issuance, according to IFR data.
For investors, five-year fixed-rate paper allowed them to take advantage of higher yields at the shorter end of the yield curve. Shorter-term debt also gives them less exposure to slowing rent growth and the potential longer-term effects of a hybrid work model that has roiled the office market since the Covid-19 pandemic.
It was secured by a portfolio of 24 loans. The mortgages were backed by 43 properties, the majority of which were in the office, retail, industrial and apartment sectors.
The deal was broadly oversubscribed even though there was a more familiar 10-year conduit issue in the market at the same time – the US$600m BANK 2023-BNK45.
Some dealmakers cautioned that five-year conduit offerings may wane once the yield curve normalises and benchmark interest rates begin to fall, which some economists forecast would happen in 2024.
Others, however, maintain five-year deals are here to stay.
“We like how [these] new issues are being structured,” said Gunter Seeger, senior vice-president of fixed income at PineBridge Investments, referring broadly to the shorter-dated conduit paper.
Indeed, maintaining investor interest in CMBS of all maturities will be critical because of the daunting maturity wall the market faces in 2024. Roughly US$242.9bn of securitised commercial mortgages – or 41.5% of all CMBS debt outstanding – are scheduled to mature in 2024, including US$48.2bn (19.9%) in the conduit format, according to Trepp and Yield Book data.
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