Finance • Section 16
corresponding level of risk for that position. For example, mezzanine and equity pieces demand a higher rate of return and are more expensive than first mortgage debt.
The amount of equity, or “skin in the game”, that a spon-
sor holds in a real estate asset is an important part of the lending equation. A borrower with little or no equity stake in a property may have different interests than another borrow- er with equity remaining in the deal, especially in the eyes of a lender. This does not discount long-term ownership where capital investments continue to be made into property to support and increase value.
Mezzanine debt and preferred equity are available in
the market, but they are typically utilized for larger transac- tions or in special situations. The accompanying capital stack graphic shows these two slices lodged between the spon- sor equity and senior lender positions. Mezzanine debt and preferred equity are riskier than the senior debt position and frequently command higher interest rates. They also have a strategic place within the capital stack, and can be utilized to finance very large transactions or help to recapitalize a maturing loan. These days it is more likely that a borrower will make use of these products for properties that are tran- sitioning ownership, adding units, or undergoing substantial renovation. The following sections focus on first mortgage debt products, but mezzanine and/or preferred equity lend- ing arms for each category often exist.
First Mortgage Debt Commercial mortgage origination was healthy through the first half of 2017, as detailed in the accompanying origina- tion index chart from the MBA’s Q2 2017 Quarterly Databook. Originations hit a cyclical peak in Q2 2007, at which point the index bottomed out in harmony with the resulting reces- sion. In the years that followed, the economy has been on the mend and origination volume has gained momentum. As can be seen in the origination index below, Q1 and Q2 2017 are both greater than their respective figures from the
year prior. At the time of this writing, statistics on origina- tion are not available for the second half of 2017. However, in each year of economic recovery, aside from 2011, there has been a trend of elevated Q4 origination over the prior three quarters.
As of Q2 2017, outstanding commercial mortgage debt
sat at roughly $3.06 trillion, up from approximately $2.90 tril- lion in Q2 2016. Banks and thrifts continue to hold the largest share of outstanding commercial and multifamily debt. Total U.S. CMBS issuance reached $101 billion in 2015, marking the largest annual volume since the recession hit in 2007. In 2016, despite the wall of maturities resulting from huge origination volume in 2006 to 2007, CMBS issuance was down nearly 25 percent. CMBS is seemingly finding its footing again in 2017. See Chart 16.3 below.
In an interesting development, life insurance companies
have surpassed the “CMBS, CDO, and other ABS issues” cat- egory as the third largest holder of outstanding commercial mortgage debt as of the Q2 Quarterly Databook. There may eventually be a reversal of this trend but, as Jamie Woodwell, vice president of CRE Research for the MBA notes, “The bal- ance of loans in commercial mortgage-backed securities (CMBS) continued its decline [in 2017], with more loans be- ing paid off and down than new loans being originated.” Commercial banks, life insurance companies, and private debt funds stepped up to the plate and originated when the CMBS market was stagnant following the recession, and have continued to report strong origination numbers.
It is important to briefly analyze commercial mortgage de- linquencies. In all categories except for CMBS, delinquencies in 2016 finished the year in line with or below those reported in 2015. Furthermore, all categories were in line with or saw a decline in delinquency rates in the first quarter of 2017 from the fourth quarter of 2016. However, as the table below re- veals, year-over-year CMBS 30-plus day delinquencies are up 0.8 percent. Finally, the graph below highlights that apart
2018 Self-Storage Almanac 161
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