An expected spike in the issuance of conduit CMBS in coming months could put supply volumes ahead of last year's pace, but also weigh on spreads.
As many as 13 conduit deals totaling US$12.2bn could price in the typically busy months of September and October, according to Bank of America Merrill Lynch analysts.
If that all comes to the market, year-to-date conduit volumes would hit US$37.5bn through October, which is 18% higher than the issuance during the same period last year, the bank said.
So far this year the market has been keeping pace with 2018, although annual conduit volumes have been dipping since 2015.
However, the drop in interest rates over the summer has led to a jump in borrowers locking in commercial mortgages, prompting an increase in CMBS.
"September is always a busy month, but with falling interest rates a lot of loans have been locked in," said one CMBS investor.
All this new paper could start to weigh on bond spreads, however.
"Pricing could be somewhat sloppy, especially at the top of the capital stack, with investors forcing spread differences among deals that are well liked and those that aren't," said BAML.
Senior Triple A rated last cash flow bonds have been trading in the 90bp area over swaps, according to Trepp data.
Bonds in the mezzanine part of the structure should hold in better, BAML said. Trepp data shows investment-grade mezzanine bonds trading around 200bp.
"Investors are looking for spread product even with higher supply coming out, so I would expect mezz tranches to remain in check if not tighten," said the investor.
Investors have been comfortable with commercial real estate fundamentals to reach down into riskier bonds, which has pushed the CMBS credit curve near its flattest level since the financial crisis.
"We see no reason for that to change over the near-to-medium term," said the bank.
One deal was being marketed with investors this week, BANK 2019-BNK20, which is being underwritten by Morgan Stanley, Wells Fargo, BAML, Academy Securities and Drexel Hamilton.
It is the first to be marketed since the last conduit deal in the market was priced on August 9, according to IFR data.