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  • By David Goldfisher, The Henley Group, Inc.

2018 Commercial mortgage-backed securities: Trending Now

Rating agencies have forecast their predictions for 2018 CMBS origination volumes. The general consensus by S&P, Fitch, DBRS, Morningstar, Moody’s and Kroll is that 2018 CMBS loan origination volume will flatten to dip relative to the roughly $86 billion securitized in 2017. The agencies generally agree that a significant tailwind propelling CMBS volume into 2018 is the continued strength of the single-asset/single-borrower (SASB) market and the current favorable low interest rate environment. Although experts at the February 2018 MBA conference in San Diego predicted that the 10-year Treasury rate will rise from 2.4% at the end of 2017 to 3.7% in 2020, interest rates will remain relatively low on a historic basis and not create a drag on the commercial real estate financing market. The major headwind constraining 2018 CMBS loan growth is the significant decline in loan maturities going from $80 billion in 2017 to $24 billion in 2018. The 2018 refinancing business pales in comparison to the wall of maturities from 2015 – 2017. CMBS Lenders have significant capital to lend but may lack the deal flow. The CMBS default rate has dropped over the prior eight consecutive months and is now at 4.51%. With all property types performing well and over 95% of CMBS loans current, the sector that seems to be the most dynamic is the retail market. Volatility in the retail sector will continue to be strongly influenced by a stores executive management team’s vision and execution of marrying and branding its e-commerce sales and marketing platform with its bricks and mortar real estate locations. Last mile delivery locations (locations between distribution centers and customers) are in higher demand as Amazon Prime, Target and Walmart compete to drastically reduce customer delivery times. Walmart recently shuttered 63 of its 660 Sam’s Club locations. According to Sam’s Club CEO John Furner,” Sam’s Club needs a strong fleet of stores fit for the future and we must exit clubs that cannot be successful under our new strategy.” Sam’s Club plans to convert 12 of the 63 closed locations to fulfillment centers in response to consumers demand for improved on-line selections and increased speed of delivery. Roughly 200 of Sam’s Club stores share a parking lot with Walmart, cannibalizing one another’s businesses. Additionally, Sam’s Club struggles to keep financial pace with and match future growth expectations of its chief rival Costco Wholesale. Costco has roughly the same number of stores but with almost twice the revenues. Costco was much quicker adapting its e-commerce platform to the demand of its customer base. Costco rolled out two new on-line delivery related offerings and created on-line marketing campaigns geared to its dues paying members. Convenience is the key driver for future sales. Retailers who flourish must accelerate its omni-channel sales approach and create distinct in-store experiences that drive both e-commerce and in-store purchases. Real estate has just as much value in serving the online customers as it does the ones - in store. David Goldfisher is co-founder and principal at The Henley Group, Inc.

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