The outlook for the CRE CLO segment evolved with the sudden outbreak of the coronavirus and widespread mitigation policies that have been put in place. The impact has been broad-ranging and has extended across industries beyond just the commercial real estate space. CRE CLOs enjoyed immense growth in 2019 which was bolstered by the continued strength of the US economy, strong capital availability, and heavy appetite for higher-yielding opportunities in a low interest rate backdrop.
At the start of 2020, industry participants largely pictured another year of solid issuance volume under the minimally volatile environment and general “risk-on” market mentality. That narrative has changed considerably in a post-COVID world with the pandemic serving as a meaningful hindrance for growth in the near-term and CRE lenders tapping the brakes on making loans until more clarity on the US economy emerges.
The sector logged $22.4 billion in new issuance across 31 deals last year, which was a 26% increase from 2018’s tally of $17.7 billion across 21 transactions – about $11.3 billion of which was issued over the second half of 2019. Overall, 2019 CRE CLO securitizations had lower leverage, higher DSCRs, shorter maturity terms, and smaller average deal sizes relative to 2018 new issues, though the differences in credit metrics were modest year over year. At the same time, the weighted average coupon reported for the vehicle also dipped below 6% to 5.88% in 2019. That cost of capital was roughly 160 basis points above the average borrowing rate on 2019’s average CMBS conduit loan.
Prior to the turmoil resulting from COVID and declining oil prices in March, four CRE CLO transactions with a combined total of $3.5 billion were brought to market, the largest being Blackstone’s $1.5 billion BXMT 2020-FL2. While it is unclear how quickly the CRE CLO market will fully rebound given the unique challenges currently facing the market, it is hard to imagine lenders providing capital for transitional hotel or retail properties in meaningful numbers anytime soon. Considering the unpredictable nature of the current market disruption and that the sector will need time to find its footing, we could potentially see overall issuance volume decline 40% or more from last year’s levels impressive total.
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