Signs from Blackstone’s borrowing strategy… In 9 out of 10 years, commercial mortgage markets are pretty boring. We're not in one of those 9 years. Consider the last year... ---- LOWER COUPONS ---- Agency coupons... down by 12% Traditional commercial mortgage coupons... down by 11% REIT bond coupons... down by 19% CMBS coupons... down by 20% ------ WHY? ------ Two drivers: 1. The 10-year yield has compressed by about 70 bps. 2. Lender spreads have also compressed (unevenly). ------ GREEN SHOOT ------ Since banks and insurance co's don't want to lead the market down, they can be slow to cut spreads. And they're even more cautious when dealing with internal challenges (e.g., office defaults). But there's no wizard behind the curtain issuing spreads in the CMBS and REIT bond markets. Those market spreads are dictated by daily competition. And those two sources of debt for commercial properties have been whispering sweet messages to borrowers recently... REIT bond spreads are in by about 50 bps. CMBS spreads are in by about 70 bps. ------ BLACKSTONE LEADS THE WAY ------ In the corner of the securitization market with the most borrower/collateral clarity, Blackstone has been leading the way on the borrowing front. Blackstone accounts for about 64% of the SASB issuance so far in 2024 (totaling about $8 billion of borrowings). ------ BIG QUESTIONS ------ 1. Will lower coupons lead to fewer defaults? The ultimate tension defining real estate performance is the fight between higher interest rates and NOI growth. Every borrower is dealing with the consequences of higher borrowing costs. For borrowers pushed into negative coverage and/or negative leverage, the only way out is to grow income. ...so all eyes are on property income growth. But while everyone was focused on occupancy and income growth, coupons have improved the calculus for borrowers and lenders focused on default risk. 2. Is the market drunk on Blackstone? The last time the debt markets had a binder (2005-07), default rates reached 30%. Rating agencies lost their minds, traditional lenders underpriced risks, and investment bankers/brokers made a lot of money (until they didn't) by financing exuberant transactions. Like Cosmo martinis and Zimas, the memories of those drunken days have largely faded. However, rating agencies often lead their analysis of these recent SASB bond offerings with citations of Blackstone's strong sponsorship. Recent example... "Experienced Sponsorship: The sponsor for the mortgage loan is Blackstone Real Estate Partners IX L.P.??Blackstone Real Estate Partners IX L.P. is an affiliate of The Blackstone Group, Inc. (Blackstone), whose real estate group was founded in 1991 and has approximately $337 billion in investor capital under management, as of 12/31/2023." ------ YOUR TAKE? ------ Will lower rates put a dent in defaults? Is Blackstone immune to default risk? #realestatefinance #blackstone
Amar Nijjar
7 个月
Good point on the cmbs spreads. Our production team is extremely busy with cmbs deals. All- in rate is starting to get a 5 handle now with cmbs front end quotes coming in at as low as 260 over 5 yr Treasury. Interesting point is that the underwriting criteria remain reasonably bulliish for e.g, full term IO, non-recourse, with the debt servicing test of 1.20 for multi-family and 1.25 for commercial. Fwd SOFRs are also projected to be 75 bps lower by end of the year and almost 150 bps lower by end of 2025.
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7 个月I can't speak to Blackstone, but at the margins, lower rates will help some borrowers avoid default. But they won't be the panacea everyone is looking for, since rates will not fall to 2022 levels, which many people need. Plus, you rightly point out that NOI growth is the other leg of this ladder, and that's a struggle, between oversupply and rapid expense growth. One can manage either higher rates or lower NOI. It's very difficult to manage both at the same time.