After years of decline, the U.S. conduit market is on an upswing. According to data from Bank of America, conduit issuance in the U.S. is expected to reach $35 billion, up from $30 billion in 2021. While the uptick is modest, it may also mark an inflection point.
Rising Rate Environment
“As interest rates rise, we may see deal flow change in the months ahead,” said Natalie Grainger, chief credit officer for CMBS at Greystone. “Multifamily borrowers may move quickly to lock in fixed-rate financing through conduits as floating rates become more expensive and less attractive.”
With interest rates on the rise, lenders will be more likely to be constrained by a property’s debt service coverage than LTV, Grainger notes. Lenders want to make sure that assets generate enough cash flow to cover debt service. And the mix in these securitized pools continues to represent a wide range of assets, from market-rate apartments and single-family rental communities to senior and affordable housing. Some innovative niches, such as RV parks, are also being included in deals.
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How the CMBS conduit market will shake out this year depends not only on demand for loans but also on investor enthusiasm for longer-duration bonds with stable performance.
Bond spreads have widened because of both the uptick in interest rates and market volatility, CMBS experts say. Grainger notes that spreads will vary based on debt yield, leverage and asset class, among other factors. In the multifamily sector they have gone up at least 20 basis points year-over-year, she adds.
Greystone is upbeat on the conduit market in 2022 for multifamily properties as well as for other asset categories. It has built a new CMBS lending team led by Rich Highfield, former president of Starwood Mortgage Capital, to expand its proprietary conduit platform.
Read the full article in Multi-Housing News.