In recent years, the commercial real estate securitization market has experienced a resurgence in issuance of commercial real estate collateralized loan obligations, with the greatest transaction volume since the financial crisis. While some worry that the re-emergence of such transactions is a harmful development for the commercial real estate capital markets, we believe that with proper motivation and continued discipline, CRE CLOs can offer benefits to both investors and issuers.
In 2016, seven different securitization sponsors each issued new CRE CLO transactions resulting in $2.5 billion of securities. In 2017, these figures grew to 13 sponsors, 18 transactions and $7.7 billion, indicating that some of issuers were beginning to access the capital markets multiple times during the year. This trend of new issuers, more transactions and greater volume has carried into 2018, and is expected to continue. So far this year, 11 issuers have executed 11 transactions, yielding in excess of $6 billion of securities.
In addition to overall market volume, transaction size also has grown. In 2016 and 2017, most of the transactions were $300 million to $400 million in size. Starting in late 2017, the market began to successfully absorb deals of more than $1 billion, with the largest post-crisis transaction to date, the $1.1 billion LNCR 2018-CRE1 pricing this May.
For investors, commercial real estate collateralized loan obligations, like other CRE securitizations, provide structured exposure to the CRE loan market and an ability to calibrate risk vs. return via the purchase of specific credit tranches of debt. CRE CLOs also offer short-duration, floating-rate securities, which can be beneficial for investors in a rising-interest rate environment.
For issuers, the CRE CLO vehicle offers an efficient alternative to warehouse lines and repo facilities for financing the business of originating short-term, floating-rate bridge loans on transitional properties. In addition to providing issuers with access to match term, non-callable, non-mark-to-market, non-recourse financing, CLO vehicles also afford issuers greater flexibility than other vehicles, such as real estate mortgage investment conduits, for securitizing commercial real estate assets.
For example, CLOs permit future funding, a feature that is particularly important for transitional assets as often additional funds are needed for the successful execution of the borrower's business plan for stabilizing the property. They also permit significant flexibility relative to on-going collateral management, including a right to purchase, and sometimes even replace defaulted or credit impaired assets.
Critics recalling pre-crisis CRE collateralized debt obligations contend CRE CLOs create the type of systemic leverage that contributed to the events of 2007-09. While this is a reasonable concern, it is important to distinguish today's CRE CLO transactions from the myriad other deals that were lumped into the broader pre-crisis CRE CDO category, as well as the collateral and structural changes that further enhance today's CRE CLOs.
One of the primary differences between today's deals and those executed in the pre-crisis years is the nature of the pool collateral. To date, all of the post-crisis CRE CLOs have been collateralized exclusively by whole loans and pari-passu participations in whole loans, which are all secured by first-mortgage liens on predominantly core commercial real estate assets. This differs dramatically from the pre-crisis CRE CDOs, which rarely were secured exclusively by whole loans, but also included subordinate mortgages or junior participations/notes and other types of debt obligations that were often unsecured or deeply subordinated in the capital stack. These prior transactions also included loans on more "off-the-run," riskier asset types like condo-conversions, land and, in some cases, even construction projects.