Banks are forecasting record issuance for the commercial real estate CLO market in 2021, as issuers securitize a backlog of loans from before the pandemic and funnel loans into struggling developments in need of new cash.
Last week, JP Morgan boosted its forecast on CRE CLO annual issuance this year to US$$22bn from an earlier figure of US$15bn, while Bank of America revised its projection to an eye-catching US$25bn-US$30bn from US$15bn.
The rebound in CRE CLO issuance from its drop last year is being driven by issuers securitizing a logjam of loans originated prior to the virus outbreak and more cash-squeezed properties are scrambling for financing, analysts said.
On Wednesday, FS Investments' REIT, FS Credit Real Estate Trust, priced a US$646.9m CRE CLO, FS Rialto 2021-FL2, bringing the sector's year-to-date issuance to US$9.8bn, which surpasses last year's total of US$7.4bn, IFR data show.
"We expect CRE CLO issuance to remain strong for the rest of the year as issuers clear out their pre-Covid-19 and 2020 originated loans and turn to 2021 loan originations. As such, we see full-year issuance volumes reaching a new record," JP Morgan analysts wrote in a research note on Friday.
The rebound in CRE CLO issuance is a boon for borrowers, as it helps finance distressed CRE loans, helping them to avoid potentially catastrophic severities, Deutsche Bank analysts said on Tuesday.
Meanwhile, investors have been drawn to these paper because they offer higher yields than conduit and SASB CMBS and their short-dated nature is a hedge against rising inflation.
"For CRE CLOs, the significant credit enhancement, shorter-duration profile and spread pickup vis-à-vis other types of CMBS – not to mention the abundant amount of transitional collateral available for securitization – could be reasons why issuance increased so sharply this year versus last year," Bank of America analysts wrote in a research report on Friday.
As CRE CLO managers bring more deals to market, some potential buyers will likely turn more critical in screening them.
"We are raising the threshold in terms of what it requires of us to look at a deal, whether we are sorting even more critically the quality of the manager or sticking more to multifamily deals, maybe staying up in the cap structure," Rich Talmadge, senior analyst at Insight Investment said.
Banks' more upbeat outlook on CRE CLO supply is offset by their more pessimistic view on conduit supply as it has been challenging to include retail, hotel and office mortgages in multi-loan offerings, Bank of America analysts said.
Bank of America analysts slashed their conduit supply estimate in 2021 to US$20bn-US$25bn from their initial call of US$35bn-$40bn. Conduit issuance totaled US$25bn in 2020, according to IFR data.