CMBS: Growing Demand For Floating Rate Products

Property interest rate,finance loan increase.investment real estate.profit of banking.economy crisis effect of coronavirus outbreak.expenses of worker

HAKINMHAN/iStock via Getty Images

By Nivea Valsaraj

Floating-rate SASB products are new favorites in the commercial mortgage-backed securities market, given their shorter tenors and greater prepayment flexibility.

The CMBS market has grown steadily over the past few years, crossing the $700 billion level seen before the Global Financial Crisis. A significant contributor to the market’s growth has been the single asset, single borrower (SASB) segment, which comprises securitization of a single loan to a single borrower collateralized by one very large property or a portfolio of smaller properties. Typically, in our view, these tend to be “trophy” properties, i.e., highest quality, best location or large property portfolios.

The SASB market has steadily grown, overshadowing the conduit market, due to increase demand for these flexible products. While issuance was historically dominated by conduit deals, issuance composition reversed in 2021 with SASB volumes double those of conduit issuance. Year-to-date issuance shows similar trends, with strong primary issuance in the SASB market. In particular, floating-rate SASB deals have been the predominant issuance format, comprising 90% of the SASB market and 48% of non-agency CMBS new issuance volumes since 2021. These deals typically have a five- or seven-year legal final loan maturity that is callable after 12 to 18 months and contains annual financial performance tests that must be met after the initial two years.

The apparent preference for the floating SASB market can be attributed mainly to the shorter loan tenor and greater prepayment flexibility it affords borrowers. SASB borrowers are typically transitional property owners such as real estate private equity funds that desire the ability to prepay debt if the property is recapitalized or sold. While SASB loans have some prepayment protections such as spread maintenance, these are typically less costly than the yield maintenance and defeasance provisions found in fixed-rate loans. Additionally, this preference can be partially attributed to the recent downturn during 2020 – 2021. With a large number of properties such as malls and hotels that experienced pandemic-induced performance disruptions, borrowers have preferred more flexible loans that can be refinanced more easily once property performance has fully recovered.

With AAA spreads currently around 160 – 190 bps and BBB spreads around 280 – 400 bps for representative large, actively traded deals, we believe this segment offers competitive relative value. AAA-rated floating-rate SASB deals have widened by 100 bps while BBB-rated deals have widened by 164 bps in recent months, compared to Bloomberg U.S. corporates’ widening of 65 bps. With higher rates and wider spreads, the market will likely see slower issuance in the coming months.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting, or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections, and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2009-2022 Neuberger Berman Group LLC. All rights reserved.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Be the first to comment

Leave a Reply

Your email address will not be published.