Commercial Mortgage-Backed Securities (CMBS) are offering better yields to investors than corporate bonds issued by lenders, which means investors seem to be betting on a commercial property recovery.
According to JPMorgan Chase & Co., relative spreads on bonds tied to hotels, shopping malls and other commercial buildings have narrowed by 30 basis points to 145 basis points above benchmark swap rates since the middle of November.
Wall Street is facing increasing demand from investors
Spreads on debt from financial companies went down by 0.6 per cent to 143 basis points over swaps, in a report prepared by the company’s analysts and dated December 7.
Since US interest rates are expected to stay close to zero through to mid-2015, investors are more inclined to consider adding riskier investments to their portfolio. Wall Street banks have stepped up the pace of originations to meet the increased demand from interested bond buyers.
According to Bank of America Merrill Lynch index data, commercial mortgage bonds have increased in value by 0.374 per cent since mid-November. Similar bonds have only gained 0.209 per cent from financial companies.
In the fourth quarter, lenders have issued approximately $16 million in bonds. Tied to a variety of properties from skyscrapers to trailer parks, this figure represents a post-financial crisis record, according to JPMorgan. Sales are expected to hit $46 billion by the end of the year, a gain of close to 50 percent over 2011.
Improving market conditions mean that landlords are better able to pay off maturing loans as sales increase. Over 60 per cent of commercial mortgages contained in bonds were paid off on time in November, according to Trepp LLC.
The New York commercial mortgage data provider further stated in its report that the monthly pay-off rate had only surpassed the 60 per cent level twice since the start of 2009.
