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The U.S. commercial real estate (CRE) sector is regaining strength in the post-crisis environment. CRE prices increased in 2013, with the Moody’s Commercial Property Price Indices (CPPI) national all-property composite index rising 16.3% in the 12 months ending in December (most recent data). At this point, PIMCO believes the CRE market has reached the middle to late innings of a recovery, with prices just 8% below their November 2007 peak. Importantly, the recovery remains notably bifurcated, with select multifamily and office property prices well above their late 2007 and early 2008 peaks, while many industrial, office and retail properties outside of major cities remain 20%–40% below their pre-crisis highs.
In addition to origination volumes increasing, lending standards have loosened, allowing credit to flow more freely to properties outside of top tier cities (e.g., New York, San Francisco). While the increase in interest rates in the latter half of 2013 put a brief pause on commercial lending volumes, the expansion in CMBS credit availability largely offset interest rate volatility. Several developments in the CMBS lending environment in 2013 reflected continued growth in origination activity:
Against this backdrop, the stage has been set for a strong 2014 in the CMBS market, despite the abundance of upcoming maturities on legacy CRE loans that will need to be refinanced. Several years ago, many market participants were concerned that this “wall of upcoming maturities” would pose material risks to CMBS investors, but robust issuance and credit expansion in recent years have resulted in a CMBS market much better positioned to provide capital: PIMCO expects 2014 CMBS issuance in the range of $60 billion – $80 billion, which should provide ample financing for the $56 billion in maturing loans this year.
While newly issued CMBS LTVs remain below the pre-crisis peaks of ~120%, recent trends clearly point to gradual increases in LTV, as well as other disturbing developments that are emerging from below the surface – including the ratios of interest-only loans and additional debt. Rating agencies that analyze CMBS debt attempt to “normalize” for these trends using their own LTV assessments based on internal adjustments, models and forecasts. These rating agency views can vary greatly from an underwriter’s typically optimistic outlook, and even among each other.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2015, PIMCO.
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