CMBS market opens up on improving economic data, renewed investor demand
Gradually improving economic data and investor's increasing appetite for risk should boost demand for new issuance within commercial mortgage-backed securities, according to JPMorgan Securities. Analysts said some market participants think the recent rally in the CMBS space is due to the reach for yield and limited supply rather than improving fundamentals. But JPMorgan warned the market tends to be forward looking and analysts believe that many investors are waiting to see how the upcoming new issuance is absorbed by the market. There's about $11.3 billion of CMBS in the pipeline and set to price in the first quarter with another $4.8 billion set to come to market in the second quarter. JPMorgan said money is starting to flow back into equities and away from bonds via mutual funds. This bodes well for MBS and is "indicative of a larger risk appetite and improving economic sentiment among investors." Analysts said more conservative underwriting standards also should help demand for new CMBS, but these increased standards tend to "deteriorate as competition heats up and issuers grab for market share." But there's still money to be made. And if the upcoming issues are well received, that could bring conduit lenders back in the fold and many legacy loans that were out of the refi zone may be able to refinance after all, according to analysts. "We believe that the mezzanine part of the new issue capital stack offers investors the opportunity to pick up yield relative to last cash flow triple-A's, and recommend that investors add exposure as far down in credit as they are comfortable," JPMorgan analysts said in the firm's securitized products weekly note. There's also opportunities for gains in agency CMBS, and analysts recommend adding exposure to high-rated bonds, as they're "poised to rally into the fall." "Over the remainder of the year, we look for spread tightening to resume as supply remains low and alternative high-quality assets offer lower yields," JPMorgan analysts said. Write to Jason Philyaw.