Document 1067957641

Securitized Products Desk Strategy
THIS MATERIAL IS NOT RESEARCH AND IS INTENDED

FOR QUALIFIED INSTITUTIONAL BUYERS ONLY
2017 CMBS Year Ahead Outlook

December 9, 2016
Making CMBS great again? Sector Strategists
While we look for continued improvement in the commercial real estate markets in 2017, our Roger Lehman
+1 212 325 2123
enthusiasm is more tempered, compared to a year ago. Upcoming change in the countrys roger.lehman@credit-suisse.com
political leadership adds an additional layer of uncertainty.
Benjamin Rozyn
A few thoughts on the future of retail and CMBS +1 212 538 2173
benjamin.rozyn@credit-suisse.com
We believe the retail sector will remain under considerable pressure, for the foreseeable
future, due to changes in economic, demographic, technological and behavioral trends.
However, it is our belief that this narrative is going to play out over a longer timeframe than
many are anticipating.
Positive trends for CRE, but greater uncertainty post election
Recent US economic trends, coupled with what we believe are constructive fundamental and
technical factors, points to an ongoing optimistic outlook for US commercial real estate. We
may be at an important transition point, for commercial real estate and the economy,
depending on what policies are enacted and how quickly they go into effect.
Small gains in CRE prices as the trajectory moderates
We believe CRE prices could continue to rise in 2017, albeit at a decelerating pace, and look
for low-single digit gains, over the next year.
Even as CMBS issuance fades other financing remains intact
Financing, flowing to the commercial real estate market, remains healthy. That dynamic
seems likely to continue into 2017.
Risk retention fears fading; 2017 issuance at $65-70 billion
While we have some concerns about how big an impact risk retention will have on CMBS,
over the longer-term, we believe that enough progress has been made to eliminate, or at least
reduce, the chance of a large market disruption, over the near-term. We believe that 2017
private label CMBS issuance is likely to be in the neighborhood of $65 billion to $70 billion.
Legacy credit responds to upcoming maturities;
Post crisis deals should see a small updraft in problem loans
We have a relatively positive outlook on CMBS credit. Legacy delinquencies will rise as the
balance pays down. We should see some rise in recent issue delinquencies, due to seasoning.
Relative Value We look for spread tightening in early 2017
Positive supply and demand technicals, supportive credit fundamentals, and pockets of good
relative value leave us fairly positive on CMBS spreads. We particularly like BBB- bonds.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND STRATEGIST
CERTIFICATIONS. This document is a product of the Credit Suisse (CS) Fixed Income Sales and Trading Department. It is not
a product of the Firms Research Department. This material is intended only for institutional investors and is not subject to all of the
independence and disclosure standards applicable to debt research reports prepared for retail investors pursuant to FINRA Rule
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contrary to the recommendations provided in this material. As part of the Trading Desk, the author may have consulted with the
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this material, or have existing positions in the securities discussed herein.
Making CMBS great again?

While we look for continued improvement in the commercial real estate markets, as we head into 2017, our
enthusiasm is more tempered, compared to a year ago and there is greater uncertainty around our
forecasts. With the recovery now one year more mature, we believe the CRE markets are, generally mid- to late-cycle,
depending on the property sector. That leaves us at a point where we can realize further performance improvements, but
these are likely to be smaller and come at a slower pace, than earlier in the cycle.
Additionally, and perhaps more importantly, a change in the countrys political leadership, following the
recent election, adds an additional layer of uncertainty and makes us less confident in making predictions.
We see both potential positives and negatives for the economy, commercial real estate and CMBS, under the countrys
incoming administration. It appears to us, from a CRE-centric vantage point, the key policy areas to focus on are
regulations, taxes, infrastructure spending and trade policy.
One of the concerns about the President-elects proposed changes is it would lead to higher inflation and
interest rates, which can hurt CRE performance. A rise in interest rates is likely to halt and reverse the multi-year
trend of lower cap rates that has been in place since the commercial real estate markets started to recover. Our view
remains that cap rate increases, accompanied by economic expansion and improved property performance, are less
worrisome. Furthermore, commercial real estate can serve as at least a partial hedge against inflation but, for it to work
effectively, supply and demand fundamentals needs to be in balance.
While we are watching the trend toward increased construction, we are not, as of yet, overly concerned about it having a
harmful effect on the sectors overall performance. It is our view that as long as the economy stays on track, effective
rents can edge higher and property level cash flows can grow, although this will occur at a more measured pace than in
the recent past.
This leads us to forecast that CRE prices could continue to rise in 2017, albeit at a decelerating pace, and
we look for low-single digit gains. Our view is based on a variety of factors, both fundamental and technical. While
some of the recent positive market dynamics are expected to remain just as strong an influence, in the coming quarters,
others are likely to exert less of a stimulus. On the positive side, we expect ongoing investment demand from both local
and non-US buyers. To this point, we are considering the impact of potential policy changes on foreign investment.
We believe the retail sector will remain under considerable pressure, due to changes in economic,
demographic, technological and behavioral trends. It is our belief that this narrative is going to play out over a
longer timeframe than many are anticipating. Better quality malls, especially those in major markets, have better long-
term prospects and will have a significantly higher survival rate, in our opinion. We lay out some of our thoughts on the
retail sector in a section below.
Beyond the physical supply and demand metrics, other factors are also essential components to property price
performance, including the availability of financing. Although CMBS origination has waned this year, the overall supply of
financing, flowing to the commercial real estate market, remains healthy. That dynamic seems likely to continue into
2017, in our opinion.
While we have some concerns about how big an impact the risk retention requirements will have on CMBS
issuance and the market in general, over the longer-term, we believe that enough progress has been made
to eliminate, or at least severely reduce, the chance of a large market disruption, over the near-term. The
few test deals to date give us some comfort that the new rules will not completely stymie issuance. Other formats, in
addition to the vertical option, will likely be tried and could also be conceivably combined with financing, further
increasing the demand and the opportunities.
Although we have confidence that the market will successfully adapt to the new regulations, we still expect
risk retention will impact the sector and we see several changes as a result. These include the timing of new
issuance (slow to start the year) and increased spread tiering between names. Lastly, we also think there is the
consideration that some or all of the Dodd-Frank legislation, the regulation that mandated the risk retention rules, gets
overturned or at least softened, at some point.
2017 CMBS Year Ahead Outlook | December 9, 2016 2

We believe that 2017 private label CMBS issuance is likely to be in the neighborhood of $65 billion to $70
billion. This would place the total very close to, but a little bit below, the $77 billion total we think is likely for all of
2016. Our estimate is based on several factors including what we believe could be a small rise in the market share for
CMBS, coupled with transaction volume that is down only slightly from this years pace.
Agency CMBS could add an additional $140 billion of issuance in 2017, up from the roughly $130 billion
total we expect this year.
We believe the amount of CMBS outstanding will continue to fall in 2016, in the neighborhood of $30 to $35 billion,
across the CMBS universe. Non-conduit transactions could see an increase in net supply this year, as gross issuance
continues at a similar pace to last years, offsetting prepayments and maturities.
Our assessment of the economy and commercial real estate performance leaves us with a relatively
positive outlook on CMBS credit. We have a comparatively sanguine view of the successful loan payoff rate, for
upcoming legacy maturities (low-70% range). However, as the balance of the legacy universe pays down the legacy
delinquency rate will likely shoot considerably higher. This does not necessarily mean credit is worse. To provide a
clearer picture of credit we separate out recently issued from legacy statistics for this exact reason.
We believe it is likely that we will see an acceleration of post-legacy credit problems in 2017 but still expect
deals to perform well, on the whole. The increase is likely to come from slowing real estate market fundamentals
and price appreciation, coupled with expected performance as deals season.
Sector relative value

A combination of positive supply and demand technicals, supportive credit fundamentals, coupled with what
we see as pockets of good relative value leaves us fairly positive on CMBS spread direction, in the tail end of
2016 and into the start of 2017.
The supply and demand technicals remain positive. New supply is likely to be very light to start the year, with the
upcoming implementation of risk retention, which has curtailed new CMBS lending. We also see demand staying strong
with CMBS as an attractive place to invest and large legacy paydowns that will need to be reinvested. In addition, we
have seen some growing interest in the sector from non-US based investors.
In recently issued conduits, we believe the best relative value opportunity is in triple-Bs and, to a lesser
extent, single-As. Deal selection, at this part of the capital stack is important however. Triple-Bs have lagged
the recovery this year, from the early widening, and we believe sponsorship in this part of the curve, which weakened in
early 2016, has recovered, especially with an improvement in perceived deal quality.
Triple-A CMBS appear fair to marginally cheap, at this juncture, and we see the potential for some tightening, relative to
corporates, over the near-term, with spreads having widened recently.
We look for increased tiering across the recently issued deal spectrum.
The recent spike in interest rates is worse for legacy credit than it is for deals issued since the financial
crisis, in our view. We also continue to find good value in single borrower deals, especially those backed by
retail properties.
Despite our projection for increased Agency CMBS issuance, we are not overly concerned with supply
impacting spreads. We see most of the sector as close to fairly valued as we enter the later part of the year.

A few thoughts on the future of retail and CMBS

Introduction
The pressure on various retail operators, including merchants and their landlords, has been well documented in both the
financial and popular press. Several retailers have declared bankruptcy this year and shut stores. These bankruptcies
include names like Sports Authority, Aeropostale, Golfsmith and Hancock Fabrics. More retail bankruptcies could hit
early next year, following the holiday selling season. But even chains not under bankruptcy protection have shut
numerous stores over the past few years, including some large department store operators like Sears, Kmart, Macys,
JC Penney and Stage Stores, to name just a few.
Our colleagues in equity research have tallied the total store closures and come to the conclusion that
announced closings, year-to-date, have totaled 78 million square feet, the highest since 2008. This puts it on
the pace of 85 million square feet for the year. We summarize their work in Figures 1 and 2.
Figure 1: YTD retail store closings (square feet) Figure 2: Annual retail store closings (square feet)
sq ft (millions) sq ft (millions)
120 120
100 100
80 80
60 60
40 40
20 20
0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Company Filings, News Articles, Credit Suisse Estimates * 2016 is estimated
Source: Company Filings, News Articles, Credit Suisse Estimates
Large scale shifts in the retail landscape and the associated negative headlines are having an outsized
effect on the CMBS market as the property type accounts for a significant proportion of the sectors
collateral. We show the proportion of conduit deals, backed by retail loans, in Figure 3.
The increasingly bearish view on retail explains much of the sectors underperformance this year, especially in various
sub-sectors, such as the CMBX.6 BB and BBB- tranches.

Figure 3: Retail remains a significant portion of CMBS conduit origination

Primary City Primary Metro Secondary Tertiary
40%
35%
30%
14% 8%
25% 10%
9% 9% 8%
9%
20% 10% 11%
12% 8%
15% 8% 7%
8% 12%
10% 8%
13% 11%
8% 9% 11%
5% 8% 5% 6%
2% 1% 1% 1% 2% 1% 1% 3%
0%
2012 2013 2014 2015 '16Q1 '16Q2 '16Q3 '16Q4
Source: Credit Suisse, Trepp
We believe the retail sector will remain under considerable pressure, for the foreseeable future, due to
changes in economic, demographic, technological and behavioral trends. Large secular shifts in consumer
behavior, over the past decade, are dampening overall demand for traditional bricks and mortar retail, as well as
determining which companies will do well and which ones will underperform. Perhaps even more important, we believe
these widespread industry changes will lead more retailers and retail assets to fail, over the coming years.
Such changes are likely to have an ongoing detrimental impact on CMBS. There have been more than two dozen
enclosed shopping malls that have shut down since 2010 and we believe more are likely to follow. We have seen more
than four dozen loans, backed by malls, liquidated since 2013, including more than a dozen this year. The loss severities
on these loans are, on average, higher than those of other property types.
To be perfectly clear, we do not believe all of retail, or every mall, is going away. However, the US is, in our
opinion, over-retailed and the demand for retail-oriented space is likely to shrink and change, due to the
changes in trend that we discuss below. As Figure 4 demonstrates, the US has, by far, the largest retail space, per
capita, among developed economies. While the US also leads the world in sales per capita, the margin is not wide
enough to support the excessive space.
Figure 4: Retail real estate space and retail sales per capita
Retail Sq ft Per Capita
30 $14,000
$11,687 Retail Sales Per Capita (right-axis)
25 $12,000
$10,000
20 24 $8,560
$8,014 $8,056
$7,167 $8,000
15
$6,000
10
$4,000
$2,238
10
5 $2,000
5 4 2 2
0 $0
US Australia UK France Germany China
Source: General Growth Properties, International Council of Shopping Center, Planet Retail and Knight Frank Research

It remains our view that, for the most part, the best quality malls, especially those in major markets, have
better long-term prospects and will have a significantly higher survival rate. Lower quality retail assets
(Class B and C properties) and the weaker malls, even in primary markets need to shrink and in many cases
will fade away, over time. Even as this segment contracts, there is a need for middle market retail but the challenges
for these assets are far greater in terms of productivity and competition, at this end of the quality spectrum. In addition
the loss severity on malls in less well located areas can be very high.
Importantly, it is our belief that this narrative is going to play out over a longer timeframe than many are
anticipating. The death of malls and the end of certain retailers have been forecasted for some time. In
fact, in 1998 Time ran a cover story called Kiss Your Mall Goodbye, discussing how shopping online is cheaper and
better than going to the store.
The CMBS market seems to have ongoing knee-jerk reactions to any negative retail news and there is a
tendency to view any adverse headline as deleterious for the entire industry. The trade this year has been to sell
BBB-.6 first and ask questions later. However, some of the concerns may be exaggerated or at least the timing of the
changes could potentially take much longer than we believe some are pricing in.
All of this creates tremendous opportunity for those willing to do their work within CMBS and CMBX, in our opinion. A
good understanding of the shifting landscape is important.
In this section we lay out some of our thoughts on the retail sector. The full implications for CMBS are still
not fully known, at this juncture, but a good understanding of the changing dynamics helps frame the
situation and allows for more informed reactions to future news. While no one can perfectly predict which retail
loans will default (and when), relative value calls based on likely outcomes will allow participants to set up for times when
the market is mispriced.
What is driving the changing retail landscape?

Without a doubt the growing prominence of online shopping (ecommerce) is pulling sales away from
traditional bricks and mortar retailers. However, ecommerce growth is not the only factor contributing to the decline
of American shopping malls and we believe it may be receiving too much weight, at least from some watchers.
The more immediate concern, at least for us, is the demise of the traditional department store model. Many
malls are anchored by large department stores which still occupy nearly half of US mall space. While these locations
generally contribute little or sometimes no rent to the landlord, they have traditionally served as a draw to the mall,
enhancing consumer foot traffic and profitability of the malls other tenants.
However, department stores have not performed well with sales on the decline since 2001, and falling by
more than 30% since the peak (Figure 5). The drop is not the result of any broader decline in retail sales which are up
more than 70%, over the same period (Figure 6). In fact, with the exception of a dip during the recession, broader retail
sales have been steadily rising.

Figure 5: Department store sales Figure 6: Total retail sales

$bn $bn
60 1300
1200
55 1100
1000
50
900
800
45
700
40 600
500
35 400
Q1 1994
Q1 2014
Q1 2002
Q1 1992
Q1 1996
Q1 1998
Q1 2000
Q1 2002
Q1 2004
Q1 2006
Q1 2008
Q1 2010
Q1 2012
Q1 2016
Q1 1992
Q1 1994
Q1 1996
Q1 1998
Q1 2000
Q1 2004
Q1 2006
Q1 2008
Q1 2010
Q1 2012
Q1 2014
Q1 2016
* Excludes leased department stores within a store Source: Census Bureau, Credit Suisse
Source: Census Bureau, Credit Suisse
Some of the decline in department store sales is related to the growth in ecommerce but we believe there
are other, more substantial changes occurring. Using the same Census Bureau data, it is clear that ecommerce
purchases have taken a larger and larger percentage of retail sales (Figure 7), rising to 8%1 in the most recent quarter.
However, retail sales are still rising, albeit at a slower pace, even when we take out ecommerce. This is shown in Figure
8 where we look at total retail sales, ecommerce sales and retail sales excluding ecommerce (the gray line). The decline
in department store sales is only partially explained by online transactions.
Figure 7: Ecommerce as a percent of total retail sales Figure 8: Retail sales ex-ecommerce
$bn Retail sales, total
9% 1400
Ecommerce
8% Retail sales ex-ecommerce
1200
7%
1000
6%
5% 800
4% 600
3%
400
2%
200
1%
0% 0
Q1 2006
Q1 2000
Q1 2002
Q1 2004
Q1 2008
Q1 2010
Q1 2012
Q1 2014
Q1 2016
Q1 2000
Q1 2002
Q1 2004
Q1 2006
Q1 2008
Q1 2010
Q1 2012
Q1 2014
Q1 2016
Source: Census Bureau, Credit Suisse Source: Census Bureau, Credit Suisse
1
It is important to note that the ecommerce total also includes online sales by traditional bricks and mortar retailers. The
International Council of Shopping Centers estimated that in 2014 only 3% of total sales were from pure-play internet sellers.
Department stores were, historically, a central shopping place for different brands, especially those trying to emerge into
the mainstream. Now, digital commerce has taken over in the building of a new brand and it makes the department
store anchor less relevant. As we discuss later, many of these same brands now have stores of their own, in addition to
an online presence. These specialty retailers are offering better selection, better pricing and better in-store experiences
than what can be found in department stores.
Shifts in the retail landscape are not new: Over time, local stores gave way to department stores and supermarkets,
followed by suburban shopping malls and discount chains and big box retailers. We believe we are in the later part of the
cycle of one of these shifts and as a result department stores will continue to fade in importance.
Shopping habits have been changing for some time with the advent of big box retailers. The expansion of stores like
Target and Wal-Mart drew customers away from the traditional department store. Furthermore, spending habits also
changed during the recent economic recession that we believe led consumers to search for better value, moving them
away from shopping at the traditional department store. While the economy has improved since, there may have been a
permanent change in shopping habits.
There have also been ongoing demographic changes as well. The growth of the middle class and the
corresponding population shift to the suburbs, in the middle of the last century, helped department stores proliferate.
More recently an urbanization trend has taken hold this is drawing millennials and aging baby boomers back to the cities.
Income distribution has also become more disparate, leading to increased demand for luxury and bargain items, but
leaving the demand from the middle income group, department stores targeted audience (and the B and C mall offerings
in general), down.
Given the above, it is not a surprise that our analysis suggests that over 750 department stores have shut
since 2011, through the first half of this year. That figure does not include Macys plans to shut approximately 100
stores by 2017.
As department store anchors are being shut we are finding many of these closures are in the lower quality, lower
performing shopping centers. This further adds to our concern about the lower-tier retail being most at risk, especially
after the loss of an anchor tenant.
The demand for retail space is shifting and declining but not vanishing
Shifting retail demand and store closures are not new and the industry has long wrestled with retailers
shrinking or going out of business: Circuit City (over 700 stores) and Linen and Things (570 stores) shut down in
2008, Service Merchandise closed in 2002 (over 400 stores) around the same time Kmart was closing locations (300
stores) and in 1997 Woolworth went out of business and closed 400 stores. As retailing evolves over time real estate
evolves with it.
As retailers adjust to the changes in spending habits, demographics and technology, we believe additional
store closures are inevitable but having a strong physical retailing presence will remain important and the
need for that is not going away, in our view. Retailers are working on finding the balance between the online and
physical presence while landlords are trying to change the mix of tenants that will continue to bring people to the
shopping center.
Technology has obviously changed the way consumers are making their purchasing decisions. Evidence suggests that
consumers prefer to engage with retailers through multiple channels and we believe retailers understand that both digital
and physical presences (so called omnichannel strategies) are necessary and complimentary. However, it is clear that
the role physical stores play is changing.
Even as retailers wrestle with how to rationalize the size of its store base, it is clear that a physical presence
supports online sales in local markets. Several retailers have pointed out that when they close a store, particularly in
a small market, they also see a drop in online sales in that area. This seems to be the result of the physical store acting
as advertisement and creating brand recognition in the area.

Retailers are also embracing a physical presence as a key component to the distribution system. A high percentage of
digital sales are fulfilled from, or picked up in, stores and an even higher percentage of online shoppers use the
stores for returns (and then often make an additional purchase). Physical stores acting as mini-fulfillment centers
allow the company to cut down on delivery time and shipping costs. By one account 40% of Best Buys and 50% of
Wal-Marts online sales are already being picked up in stores (the acronym BOPUS is being used for Buy Online
Pick Up at the Store). Macys just renovated its store at Easton Town Center with the changes including its
Connect@Macys concept. This serves as a pickup location, in the store for customers who bought online (and who
also get designated parking spots).
Finding the right mix between ecommerce and physical space known as convergence is not an easy
problem to solve and we believe will take time to sort out. Lines between the traditional online retailers and those
that have historically operated physical space are becoming less clear. The internet can help drive traffic to the mall and
to retailers. In fact, of the top 25 ecommerce retailers, according to eMarketer, 18 are more traditional brick and mortar
retailers including places like Wal-Mart, Macys, Best Buy and Nordstrom, all of which are in the top 10.
We think there is no greater evidence of the importance of a physical store presence than to see several of the
born online retailers begin to open physical locations; Companies such Warby Parker, Bonobos, Athleta and Apple
are just a few that exemplify this trend (clicks-to-bricks). Even Amazon.com is developing brick and mortar shops. Once
again, as these retailers start to open stores they have typically focused on the best locations and the best properties.
There has always been an ongoing rotation of leading retail names with new ones coming in to replace those that are
leaving. It is not just the born online retailers that are adding space. For example, demand for new stores is coming from
several retailers in the so called fast fashion area, many of which started overseas and are expanding to the US. These
include retailers such as H&M, Primark, Topshop and Uniqlo.
Survival depends on the right tenants; Experiential retail picks up
While overall demand for space is arguably shrinking, we believe the landlords that are able to adapt and quick to do so
have the best chance of not only surviving, but capitalizing on the shifting landscape.
The definition and perception of an anchor tenant is changing. Landlords are wrestling with ways to attract
customers given the declining draw of the traditional department store. Part of this is replacing tenants that are not
working with those that are and providing consumers with the right blend of stores and attractions.
Many retail operators are adding more service and entertainment establishments to their mix as these
offerings tend to be harder to replicate online and therefore more resilient to the growth of ecommerce. Restaurants,
theaters and exercise facilities are some of the notable examples. This is being described as experiential retail. Other
examples include bowling alleys, arcades, kids playgrounds, museums or even amusement park rides, in larger centers.
Such offerings not only drive traffic to the property but ideally keep customers at the property for longer too.
Developers are also focused on how to integrate with mobile-friendly concepts that help to draw shoppers to the center.
Examples include helping customers find parking or retailers that have certain offerings in stock.
Similarly, individual retailers are also working on experiential retail as a way to attract and retain customers. Examples of
this include interactive technology and virtual or augmented reality, where high tech mirrors show how clothes would look
on a shopper. In-store yoga classes in shops selling fitness apparel is another example. The goal is to offer a differentiated
and engaging experience with changes in the service they provide to match the way people want to shop today.
Lower quality malls, especially in smaller markets, are most at risk
The overall decline in the demand for retail space should have a disproportionate effect on the lower
quality, lower performing shopping centers. We believe higher quality malls could actually be, on net, a
beneficiary of these shifts.
When an anchor tenant, even a poorly performing one, leaves a lower-tier mall, it often puts pressure on the other
retailers at the property and it is difficult to find a new, better drawing tenant to replace them. It can also be expensive to
reposition the vacant property and often the landlord is unable or unwilling to invest further in the property. The damage
can be compounded by co-tenancy agreements which can allow other tenants to reduce their rent. Strong sponsorship
from the propertys landlord can mitigate such risks.
We have of course seen underperforming anchors close at better malls but this can prove to be a net
positive for the property as the landlord may attract a higher quality, higher paying and higher drawing
tenant. General Growth Properties recently bought several Macys locations from the company with the idea of
redeveloping the space and replacing them with more profitable and better drawing tenants. Similarly, the Seritage
Growth Properties spin-off of Sears and Kmart space was done with an eye of redeveloping and re-tenanting those
properties with better retailers. The space that Seritage has been able to release is garnering a rent of over $20 per
square foot compared to around the $4.31 rate that Sears was paying for the same space.
As discussed, while some national chains are expanding they are also more likely to focus on adding only in the best
locations and the largest metro areas. This further adds to our concern about the lower-tier retail assets being most at
risk, especially after the loss of an anchor tenant.
Class B and C malls also face much more competitive pressure. On one end, these properties are losing out to
the Class A malls, which attract a high quality tenant and consumer. On the lower end, they are facing pressure from the
discounters and the big box retailers.
While the competitive pressure on B-malls is greater, those that face less competition, at least from other nearby malls
and shopping centers, are arguably better situated. While we continue to favor A-malls in prime areas, the best mall in a
secondary or even tertiary location may continue to survive because of a lack of competition. That said, we recommend
keeping a watch out for new centers being built nearby. We have seen several examples of a newly constructed mall
impairing the credit performance of loans backed by the pre-existing mall.
It is worth noting that while there are numerous lower-B and C-type malls in the country (and certainly many
with exposure to CMBS), the concentration of value remains in the Class A properties. Work by our colleagues
in equity research, earlier this year, suggests that the top 95 malls generated nearly three times the sales volume as the
bottom 184 malls, even though there a far fewer of them.
All of this leads us to believe that the gulf in performance between top malls and the B/C malls will continue to increase.
The changing landscape should present opportunities in CMBS
Retail concerns have weighed heavily on the CMBS sector for some time but these have accelerated this
year. We believe these worries in part explain the underperformance of the sector, especially in some parts of the
market, such as CMBX.6. We show price and spread performance in Figure 9 and Figure 10, respectively.
Figure 9: BBB- / BB CMBX.6 prices Figure 10: BBB- / BB CMBX.6 spreads

$px bp
BBB-.6 BB.6 Diff BBB-.6 BB.6
105 1,000
900
100
800
95 700
600
90 500
400
85
300
80 200
100
75 0
Jan-15
Mar-15
Jul-15
Jan-16
Jul-16
Mar-16
Sep-15
Nov-15
Sep-16
Nov-16
May-15
May-16
Jan-15
Mar-15
Jul-15
Jan-16
Jul-16
Mar-16
Sep-15
Nov-15
Sep-16
Nov-16
May-15
May-16
Source: Credit Suisse, Markit Source: Credit Suisse, Markit

Just as importantly, we do not see this pressure ending anytime soon. We have definite concerns about the
future of retail and the impact that it will have on assets and loans. We have little doubt that more stores will close and
additional retailers will likely vanish over the coming year.
That said, while concerns are clearly warranted - and retailers and landlords will continue to feel pressure -
we also believe all of retail is not going away. We have long been of the view and continue to believe its going to
be a story of haves and have nots.
More importantly, it is our view that this story is going to play out over a longer timeframe than we believe
many are anticipating. The death of malls and certain retailers have been forecasted for some time. While the pace of
the decline has arguably accelerated, we still believe these large scale changes could still take a while to play out and
the timing remains difficult to predict and could, arguably, have a bigger impact on CMBS/CMBX value than the various
loans ultimate survival rate.
We believe all of this creates tremendous opportunity for those willing to do their work within CMBS and CMBX.
Understanding which deals are exposed to negative headlines and which deals are not allows investors to take
advantage of market mis-pricings.
Positive trends for CRE, but greater uncertainty post election

The most recent US economic trends, coupled with what we believe are constructive fundamental and
technical factors, points to an ongoing optimistic outlook for US commercial real estate performance, in our
opinion. While we look for continued improvement in the commercial real estate (CRE) markets, as we head
into 2017, a positive for CMBS, our enthusiasm is more tempered, compared to the start of last year and
there is greater uncertainty around our forecasts.
We noted in last years Outlook that the CRE markets appeared to be generally mid-cycle. The recovery is now one year
more mature leaving us at a point where we can realize further performance improvements, but these are likely to be
smaller and come at a slower pace, than earlier in the cycle. Additionally, these improvements are likely to be varied
across the property types and geographic areas, as each sector is at a different point in the recovery/expansion phase.
Regardless, even as construction has increased, new supply, in aggregate, is still largely in check, which should support
fundamental improvement.
Additionally, and perhaps more importantly, a change in the countrys political leadership, following the
recent election, adds an additional layer of uncertainty and makes us less confident in making predictions,
for the entire year, than we have been in recent prior outlooks. Arguably, this is usually the case when a new president
takes office, even if there is a continuation of the political party in power. With potential now for notable shifts in policy,
we would argue the lack of clarity this time is amplified. That said, while we believe the longer-term outlook is subject to
increased haziness, near-term we believe US commercial real estate will continue to perform well.
Economic environment trumps most other factors

Commercial real estate, over the past few years, has benefited from a slow but ongoing US economic
expansion. Consistent job growth and improving GDP have led to an increase in the demand for space. This, coupled
with limited new construction, has driven occupancy rates and rental rates up, resulting in higher property-level cash
flows, and helped to increase real estate prices.
We show the strong relationship between CRE and economic performance in Figure 11. The exhibit shows the year-
over-year change in US employment and compares it to the changes in commercial real estate prices. The relationship
has remained robust, over several cycles, during much of the past four decades. While there are other factors to
account for, just based on the recent economic trajectory, we would forecast another positive year for commercial real
estate, although perhaps with some moderation in the returns.

Figure 11: A strong relationship between employment and CRE prices

20% 6%
10% 3%
0% 0%
-10% -3%
Y-o-Y change in property prices

-20% -6%
Y-o-Y change in US employment (rhs)
-30% -9%
1980 1985 1990 1995 2000 2005 2010 2015
Source: Credit Suisse, NCREIF, Bureau of Labor Statistics
What does a Trump administration mean for the economy and CRE?
Given the recent political changes we may be at an important transition point for commercial real estate and
the economy, depending on what policies are enacted and how quickly they go into effect. This coming year,
arguably more so than any other since the recovery took hold, it is important to keep a watchful eye on any such
changes to assess their immediate and longer-run impact on the real estate cycle. That said, we are also keeping in
mind that many of the discussed policy transitions may take some time to negotiate and enact so the implications may
play out over time.
Attempting to stay impartial and apolitical, we see both potential positives and negatives for the economy,
commercial real estate and CMBS, under the countrys nascent new leadership. The superficial answer is, of
course, that President-elect Trump is a commercial real estate professional and is unlikely to enact policy changes that
negatively affect the sector that has been at the center of his business world. We believe the analysis is more
complicated than that. As noted above, we will be very focused on how any policy change affects the economic outlook
as there is potential for some of his campaign pledges to have negative and unintended consequences, if enacted as
stated. We also note there is the chance, as is the case with almost any elected official, that some of his campaign
rhetoric may not be realized and could be tempered into a more pragmatic approach. It appears to us, from a CRE-
centric vantage point, the key policy areas to focus on are regulations, taxes, infrastructure spending and trade policy.
We agree with our Research groups assessment that the election leads to an economic outlook that is very dynamic
and complicated with policies that could bring a mix of good and bad. Ultimately, we believe it will depend on which
parts of Trumps campaign platform are enacted and in what form as to whether or not the positives will outweigh the
negatives.
The election has resulted in a heighted period of uncertainty which our research group believes could be a negative for
the economy in the short-run. Increased volatility is also a negative for the financial markets and CMBS specifically.
The economics research team indicates that President-elect Trumps plan to boost infrastructure-targeted government
spending should help economic growth and is a medium-term positive. Additionally, his plan to cut taxes, at the personal
and federal level, if enacted, could help the economy and arguably be a positive for commercial real estate. One thing to
be cognizant of is the like-in-kind (1031) tax exchange, which allows landlords to sell property without paying tax, could
be eliminated or changed. This would be a negative for CRE.
There are concerns over the longer-term impact of potential foreign policy changes, which bears monitoring, as these
plans unfold. We believe foreign policy changes could also impact not only US economic growth but, in addition, the
demand for US commercial real estate from foreign buyers. We discuss that in slightly more detail below.
President-elect Trump has been very vocal about reducing regulations including the dismantling of Dodd
Frank. From a CRE performance perspective we believe the importance of reduced regulations, including any changes
in risk retention rules, would be a net positive for the sector. We discuss our views on the upcoming risk retention
implementation further below.
One of the concerns about Trumps proposed changes is it would lead to higher rates of inflation and interest rates, as
the result of increased government spending and tax cuts, as well as potential changes in foreign trade policy. Concerns
over higher rates of inflation have clearly been seen in the 10-year note which is up more than 50 bp since the election.
Academic literature suggests that private real estate is at least a partial hedge against inflation. Rents generally rise
during inflationary periods, while fixed cost financing does not. The rise in cash flow can provide a partial offset to an
increase in cap rates, which also generally rise with higher interest rates. Additionally, construction costs also generally
grow, during periods of inflation, which can keep new supply in check. One study found that the correlation between
inflation and the return on commercial real estate was 0.32, on a quarterly basis and 0.41 on an annual basis, similar in
scope to our own calculations.
While real estate can be an effective hedge against inflation, for it to work efficiently, supply and demand needs to be in
equilibrium. If newly enacted policies can provide sustained economic growth and higher productivity, then the effect of
higher interest rates, on commercial real estate, is manageable, in our view. However, if the changes result in only a
short term economic gain without a boost to fundamentals, higher rates are a negative for CRE performance.
Vacancy and supply are now closer to being in balance

The rise in the construction and delivery of new commercial real estate space bears watching, but we are
not, as of yet, overly concerned about it having a harmful effect on the sectors overall performance. We
believe the rise in projects is consistent with and supportive of our notion that CRE is mid-cycle.
In the early parts of the recovery stage, the lack of new supply contributed to the improvement in fundamental
performance, keeping absorption and rental rates up. Several years of rent growth and declining vacancies have naturally
led to an increase in building. We show private commercial real estate construction, excluding multifamily as a
percentage of GDP, over a 50+ year period in Figure 12.
Figure 12: Commercial construction as a % of GDP Figure 13: Multifamily construction as a % of GDP is
is rising but well below the historical norms through its pre-2008 recession 20-year average
2.0% 1.6%
1.8% 1.4%
1.6%
1998-2008 1.2%
1.4% average
1.2% 1.0%
1.0% 0.8%
0.8% 0.6%
1998-2008
0.6%
0.4% average
0.4%
0.2% 0.2%
0.0% 0.0%
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Source: Credit Suisse, Bureau of Economic Analysis (BEA) Source: Credit Suisse, Bureau of Economic Analysis (BEA)

This measure has seen a definite uptick, compared to the multigenerational low reached a few years ago, but is still
below the historic norm. In fact, despite this measure registering the highest level since the start of the recession, it is
remains lower than any quarterly read between 1965 and 2008.
We broke out the multifamily component in Figure 13, which shows construction in this sector has been on an earlier
and more aggressive upswing, breaking through its pre-recession 20-year average in the middle of last year.
We expect to see new development projects continue next year, across commercial real estate, although
perhaps at a slightly slower pace than in 2016. One of the factors likely to cause some drag is a rise in construction
costs, even as the prices for many of the materials used have declined. Construction costs in some cities are rising
much faster than the CPI inflation rate. This is largely due to the cost of labor.
In addition, the cost of financing new projects should rise, given the back up in rates and the fact that banks have
reported tightening their standards for construction and land development loans, amid rising demand and increased
regulatory oversight. The tightening, over the past few quarters, can be seen in the Federal Reserves Senior Loan
Officer Survey shown in Figure 14. Usually construction rises as property prices go up, relative to replacement costs.
However, while construction lending has picked up, as Figure 15 shows, loans outstanding are about half the level they
were during the prior peak.
Figure 14: Net percentage of domestic banks Figure 15: Bank construction loans have increased
tightening standards for CRE loans with CRE prices but are at about half the prior peak
50 Construction & dev loans outstanding*
Const / Land Moody's/RCA CPPI (right-axis)
Nonfarm Nonresi $bn
40 Multifamily 700 220
600 200
30
180
500
20 160
Tightened 400
140
10 300
120
0 200
100
100 80
-10
Eased 0 60
2006Q4
2011Q4
2000Q4
2001Q4
2002Q4
2003Q4
2004Q4
2005Q4
2007Q4
2008Q4
2009Q4
2010Q4
2012Q4
2013Q4
2014Q4
2015Q4
-20
3 4 1 2 3 4 1 2 3 4 1 2 3
2013 2014 2015 2016
Source: Credit Suisse, Federal Reserve * For FDIC-insured commercial banks & savings institutions
Source: Credit Suisse, FDIC, Moodys/RCA
The ratio of completions to absorptions has moved closer into balance for office and retail properties, although the
proportion was still below 1, for the first three quarters (Figure 16). For industrial properties, the ratio is up for the past
three years but remains well below the point where new completions have outpaced absorption.

Figure 16: Completions-to-absorption ratio by property type

Multifamily Office Retail Industrial
1.4
1.2
Completions > Net Absorption
1.0
Completions < Net Absorption
0.8
0.6
0.4
0.2
0.0
2011 2012 2013 2014 2015 '16Q1-Q3
Source: Credit Suisse, Reis, CoStar
For multifamily properties, completions are set to outpace absorption, for

Figure 17: Multifamily building permits
the third straight year, as new supply has come on line. Permit data, a
may have started trending back down
lead indicator for supply, is showing some signs of slowing down (Figure 650k
Building permits, 5+units
17). 600k 12mo average
550k
We have also been watching the additional supply of new rooms coming 500k
on line in the lodging sector. Figure 18 shows the additional supply, as a 450k
percentage of the current inventory. Supply grew about 1.5%, on a year- 400k
350k
over-year basis, up from the prior few years, but still below the 2008 to 300k
2010 growth rates. Despite this, occupancy levels through the first ten 250k
months of 2016 are, in aggregate, roughly unchanged over the same 200k
150k
time frame in 2015 (Figure 19), while RevPAR has been a touch higher 100k
(Figure 20). 50k
0k
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Credit Suisse, US Census Bureau
Figure 18: Change in US hotel supply Figure 19: US hotel occupancy rates Figure 20: US hotel RevPAR
3.0% Y/Y % change 80% $100
2.5% 75% $90

2.0% 70%
$80
1.5% 65%
$70
1.0% 60% 2012
2013 $60 2012
0.5% 55% 2013
2014
$50 2014
0.0% 50% 2015 2015
2016 2016
'16YTD
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
45% $40
Feb
Aug
Sep
Oct
Apr
Feb
Apr
Nov
Dec
Aug
Sep
Oct
Jul
Nov
Dec
Jan
Mar
May
Jun
Jan
Mar
May
Jun
Jul
* 16 YTD is through October 2016 Source: Credit Suisse, STR Source: Credit Suisse, STR
Source: Credit Suisse, STR

Even as development has continued and new space has come on line, vacancy rates have, generally, been stable to
slightly better over the past year, for each of the major property sectors. We show the historical movements in vacancy
rates in Figures 21 through 23. In addition, we have overlaid the unemployment rate, which once again shows the
importance of this economic indicator on real estate performance.
Figure 21: Office vacancies Figure 22: Retail vacancies Figure 23: Multifamily vacancies
Office (LHS) Retail (LHS) Multifamily (LHS)
22% 11% 16% 11% 9% 11%
Unemployment Unemployment Unemployment
20% 10% 14% 10% 8% 10%
18% 9% 12% 9% 7% 9%
16% 8% 10% 8% 6% 8%
14% 7% 8% 7% 5% 7%
12% 6% 6% 6% 4% 6%
10% 5% 4% 5% 3% 5%
8% 4% 2% 4% 2% 4%
6% 3% 0% 3% 1% 3%
1990
1995
2000
2005
2010
2015
1990
1995
2000
2005
2010
2015
1995
2000
2005
2010
2015
Source: Credit Suisse, CBRE-EA, BLS Source: Credit Suisse, CBRE-EA, BLS Source: Credit Suisse, CBRE-EA, BLS
The improvement has varied across property sectors, which is not surprising considering each property has its own lag to
the economy. Across the major property types, multifamily generally has shorter lags to the economy and, as the figure
demonstrates, saw the quickest and strongest improvement as markets started to rebound. As we noted above, its
stronger performance led to an increase in construction. This has kept vacancy rates relatively unchanged over the past
year, close to its historic lows. Office and retail have seen further vacancy declines, over the past year.
Cash flows and rental rates are still trending higher but at a slower rate
As long as the economy stays on track, we expect to see effective rents edge higher and property level cash
flows grow, although we believe this will occur at a more measured pace than in the recent past. We show
the year-over-year changes in rental rates, for office, retail, multifamily and industrial, in Figure 24. As with many other
indicators, while rental rates have uniformly increased, across the different property types, there are substantial
differences with respect to degree and velocity. Industrial rates, where supply and demand fundamentals are strong,
have seen accelerating growth. On the flip side multifamily growth, while still positive and strong, has decelerated.
Figure 24: Year-over-year rental rate changes Figure 25: Year-over-year change in NOI
YoY rent Office Retail NOI chg Office Retail
Multifamily Industrial 15% Multifamily Industrial
10%
8%
10%
6%
4% 5%
2%
0%
0%
-2% -5%
-4%
-6% -10%
-8%
-15%
-10%
Q1 02
Q1 03
Q1 04
Q1 05
Q1 06
Q1 07
Q1 08
Q1 09
Q1 10
Q1 11
Q1 12
Q1 13
Q1 14
Q1 15
Q1 16
Q3 01
Q3 02
Q3 03
Q3 04
Q3 05
Q3 06
Q3 07
Q3 08
Q3 09
Q3 10
Q3 11
Q3 12
Q3 13
Q3 14
Q3 15
Q3 16
Source: Credit Suisse, Reis, CoStar Source: Credit Suisse, NCREIF

The growth in occupancy and rental rates has resulted in increasing net operating income (NOI) and cash flow, across
commercial real estate sectors. We show the trend of NOI growth rates, by property type, using NCREIF data, in
Figure 25. By this measure NOIs were up by 5.4% over the past year, as of the third quarter.
Similarly, CMBS-related properties have also seen consistent cash flow growth, over the past couple of years. This
keeps us positive on the prospects for further increases in commercial real estate prices but we are also wary that cap
rates may eventually turn higher and mitigate the impact of cash flow improvement.
Small gains in CRE prices as the trajectory moderates

We believe CRE prices could continue to rise in 2017, albeit at a decelerating pace, and look for low-single
digit gains, over the next year. Our view is based on a variety of factors, both fundamental and technical. While some
of the recent positive market dynamics are expected to remain just as strong an influence, in the coming quarters,
others are likely to exert less of a stimulus. Slowing price appreciation is expected as we reach later into the cycle, as we
noted above. Lastly, we make this forecast, as well as many others this year, with far less certainty. The lack of clarity
about potential policy changes, from the new administration, introduces some additional ambiguity into the factors we
discuss below.
As we look forward, we see some positives factors, some negative ones and whole host of reasons to be uncertain
about the magnitude of price moves in the coming quarters.
That said, the cornerstone of our view on prices is based on the notion that there will be consistent demand
for commercial real estate space, absent a huge turn in the economy, and this will help push property level
cash flows higher, over the coming quarters. Real estate trends tend to move slowly and with a lag to the
economy, given the nature of leases. Our enthusiasm about improved property performance is tempered, somewhat, by
the risk of higher cap rates and borrowing costs, in a rising interest rate environment. It seems we have been discussing
the risk of rate rises for a number of years but given the recent move in the 10-year, the threat appears more imminent.
Our general conclusions about the impact of rising rates still hold. Although there are challenges for CMBS
in a higher rate environment, there are also mitigating factors that serve to counterbalance them. We would
argue that the commercial real estate and associated financing markets have become better positioned to handle rising
rates over time. We discuss the financing markets in more detail below and argue that they continue to be supportive of
further price increases as well.
CRE price appreciation has already started to decelerate
Commercial real estate prices rose again in 2016 and the gains appeared to accelerate, over the past few months, after
a subdued star to the year. The Moodys and CoStar indices are up 6.3% and 6.8%, respectively, through October, and
8.6% and 7.8% over the past year. Interestingly, the Green Street and NCRIEF indices have seen slightly smaller year-
to-date gains, up 3.2% (through November) and 3.3% (through Q3), respectively. The results are in line with our
outlook for mid- to high-single digit increases, but slower than in 2015.
We show the annual changes, across various measures, as well as the progression of the indices themselves, in
Figures 26 and 27. As we often note, some variations in performance estimates come from index construction but
others are the result of the specific markets and property sectors these various indices follow. The quality of properties
and the share of the distressed assets can also have a large impact on index performance.

Figure 26: CRE property price indices Figure 27: Annual changes in CRE price indices
140 Moody's
Moody's Greenstreet Moody's - Non-
130 Moody's Major major
CoStar NCREIF
Green Street NCREIF CoStar - All Markets markets
120
110 2007 7.0% 12.6% 1.0% 9.4% 15.9% 3.9%
100 2008 -29.8% -9.5% -12.4% -18.9% -17.1% -20.4%
90 2009 -2.6% -20.8% -16.4% -25.7% -25.9% -25.5%
80 2010 21.0% 7.9% -5.0% 9.2% 15.7% 3.6%
70 2011 11.7% 10.0% 0.9% 8.1% 10.7% 5.9%

60 2012 5.7% 6.5% 6.0% 8.4% 8.4% 8.4%
50 2013 7.3% 7.2% 7.7% 16.3% 17.8% 14.9%
40 2014 10.0% 8.2% 13.8% 16.4% 17.4% 15.5%
Q3 02
Q3 03
Q3 04
Q3 05
Q3 06
Q3 07
Q3 08
Q3 09
Q3 10
Q3 11
Q3 12
Q3 13
Q3 14
Q3 15
Q3 16 2015 9.6% 10.2% 11.6% 10.6% 12.0% 9.4%
2016 ytd 3.2% 3.3% 6.8% 6.3% 5.1% 7.3%

Source: Credit Suisse, Green Street Advisors, CoStar, NCREIF, Moody's/RCA * Green Street is through November 2016, NCREIF is through Q3 2016 while the rest
are through October 2016
Source: Credit Suisse, Green Street Advisors, CoStar, NCREIF, Moody's/RCA
As the chart shows, all of these indices are now above their pre-financial crisis high watermark. However, just because
prices are higher than the prior peak does not, de facto, mean the sector is overvalued. Similarly, while commercial real
estate prices have risen relatively more than residential prices have, it does not indicate CRE prices are too high. We
believe there are not only fundamental reasons for the increases but other factors that explain the rise in prices as well,
that should not be dismissed.
As is usually the case there have been some large variations in performance by property type. Surprisingly, multifamily, a
sector that many were worried about a year ago (ourselves included) realized the largest gains over the year, according
to the Moodys index, up 12.6% over the past year. The non-apartment markets were dragged down, in part, by a
decline in the office component earlier this year but that index has rebounded, even as price appreciation for retail has
wavered.
Index composition and sample size can lead to large fluctuations as the sample size falls, especially in a transaction
based index. The drop in transaction volume this year may not only have affected the various indices but also raised
concern over the overall health of the CRE markets.
Drop in transaction volume calls into question the health of the cycle
US commercial real estate transaction volume is down fairly heavily, versus 2015. The largest drops occurred earlier in
the year but even Octobers total has fallen well short of the same period last year. Normally, one would expect prices to
also decline with dwindling trade volume. Even though that has not been the case this year, the trend in transaction
volume has prompted concerns that the decline is signaling a turning point for real estate prices.
We will continue to watch transaction volume as we believe it is a bellwether indicator for the health of the
CRE market. However, at this juncture we are not overly concerned by what we have seen as we think
healthier trends underlie the headline statistics. In fact, we noted last year that transaction volume appeared to be
nearing a plateau so this fall off is not a surprise to us, although we were taken aback by the first quarters anemic total.
We show the quarterly transaction volume in Figure 28 and compare this years cumulative volume (bars), through
October, to the rate in recent years, in Figure 29.

Figure 28: While transaction volume has slowed this Figure 29: it still remains relatively high
year compared to prior years
$bn 2016 2011 2012
$bn 2013 2014 2015
180
600
160
140 500
120
100 400
80
300
60
40 200
20
0 100
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
Q1 15
Q3 15
Q1 16
Q3 16
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Credit Suisse, Real Capital Analytics Source: Credit Suisse, Real Capital Analytics
First we believe it is important to realize that even as volume is down, versus 2015, the overall level of activity is still
elevated, on a historical basis. As Figure 29 shows, while year-to-date volumes through October are down nearly 12%,
they are 11% greater than volumes over the same time frame in 2014.
Additionally, the slowing in 2016s volume was mostly attributed to the first quarter, which was 17% lower, year-over-
year. We believe the macro market shock, in early Q1, contributed to the plunge in volume to start the year.
Nevertheless, at $115 billion, this years first quarter volume was the third largest Q1 over the past fifteen years. The
other two periods were in 2015 at $139 billion and in 2007 at $154 billion.
Volume has picked up, on an absolute and relative basis, as the year progressed. But volumes will still likely be off last
years pace, and the fourth quarter comps will also be difficult to match, with Q4 2015 being the largest quarterly
amount on record.
We believe there is the risk that there could be a temporary pause in activity and volumes could slow into the end of this
year, with potential for deals under contract to either be postponed or canceled. In addition to conduit lenders pulling
back with risk retention looming, there are a number of other reasons for slowing volumes. First, the recent move higher
in rates may have increased borrowing costs. Additionally, the economic and political uncertainty may cause investors to
reconsider their investments, for the near-term. Lastly, the stronger US dollar may cause some pullback in foreign
investment in the fourth quarter.
Still, we view the transaction levels, which remain higher than in most other years, as relatively healthy but the falloff also
likely portends decelerating price appreciation.
Expect ongoing investment demand both from local and non-US buyers
When considering the possible trajectory for commercial real estate prices, we believe it is important to think about the
demand and sources for equity, for the purchase of bricks and mortar.
We believe that CRE has become an increasingly popular asset class for institutional investors, in the US
and abroad, over the past few years. The sector offers a relatively high yielding investment alternative and also
provides diversification as macro volatility picks up.

Private capital allocation still rising but also at a slower pace

Similar to transaction volumes, we are seeing signs that additional allocation to the sector is slowing. We think this lends
credence to our notion that CRE price gains may decelerate, but there is support for them at current levels.
Institutional investors have been targeting an increasing portion of their Figure 30: Real estate allocation of
allocation to commercial real estate. The targeted percentage has been institutional investors
rising each year and is now just short of the 10% threshold, as we show
in Figure 30. Furthermore, the same constituents in that analysis indicate 12%
9.9%
9.6%
9.3%
8.9%
they plan on raising the allocation to 10.3%, in 2017. Even though these
10%
are small increases, the total additional dollars represent meaningful
demand in commercial real estate. 8%
5.6%
5.2%
Perhaps more relevant, the report indicated that the same institutions
4.5%
remain under-invested, by about 100 bp, relative to their targeted 6%
3.7%
3.2%
allocations. We believe this is perhaps less beneficial for future price
2.9%
2.1%
increases but will provide support for prices and preventing a large 4%
decline in value.
2%
Further evidence of the asset class becoming more mainstream can be
seen in the amount of capital raised for investment. Capital raising, by 0%
1980
1985
1990
1995
2000
2005
2010
2013
2014
2015
2016
private funds, earmarked for real estate investment, has been lower this
year than last, but still totaled $74 billion globally, during the first three
quarters, according to Preqin, which tracks the alternative asset industry. * 2013 and on is targeted allocations
We show the quarterly trend, over time, in Figure 31. Arguably the drop Source: Cornell University and Hodes Weill & Associates;
NAIOP/Development Spring 2015 issue
in the amount of capital raised for US investments has fallen less than it
has for non-US targets, especially in the later part of the year, post the BREXIT vote. In addition, Preqin tracks the
amounts of uncalled capital held by closed-end private real estate funds, what it calls dry-powder. By the end of the
third quarter this total stands at $225 billion including $125 billion earmarked for North America (Figure 32).
Figure 31: Global private real estate fundraising Figure 32: Dry powder by primary geography focus
$bn Q4 Q3 Q2 Q1 $bn Rest
140 250 North America
120
200
100
150
80
60 100
40 50
20
0
'16Q3
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
2010 2011 2012 2013 2014 2015 2016
Source: Preqin, Credit Suisse Source: Preqin, Credit Suisse
Possible policy changes and their impact on foreign investment bear watching
Non-US investors continue to view the US commercial real estate market as a large, liquid, high yielding
safe haven and investment by these entities remains robust. While the full year total amount invested may wind
up lower, versus last year, the amount should be taken in relative context as the total is still up significantly, versus not
only the 2010 to 2014 period, but also a much longer time frame. In addition, we note that the decline is not specific to
the US. In fact, the United States has accounted for an increasing share of cross border investments this year, even as
the total dollars put to work has fallen. New York City surpassed London as the top area for global commercial real
estate investment, over the past year, according to Cushman and Wakefield. The shift, likely precipitated by BREXIT,
highlights the importance of policy changes on investments.
Cross border purchases of US commercial real estate reached $60 billion, year-to-date, (about 14% of the total). While
this amount looks likely to fall short of last years total, the percentage of foreign investment this year still remains high,
relative to prior years (Figure 33). Additionally, we find it notable that the 2016 year-to-date total is in excess (by a
decent margin) over the full year totals for all but 2007 and 2015.
Figure 33: Cross-border acquisitions in US CRE Figure 34: 2016 foreign investors by country
$bn Canada
120 18%
Cross-border acquisitions 19%
Germany
9%
100 Pct of total acquisitions (right- 15%
axis)
Singapore
80 12% 6%
South Korea
6%
60 9%
China
Qatar
22%
5%
40 6%
Switzerland
20 3% 5%
Israel
4%
0 0%
'16YTD
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Other
24%
* Percent of total acquisitions for 2016 YTD is as of Q3 * Year-to-date

Source: Credit Suisse, Real Capital Analytics Source: Credit Suisse, Real Capital Analytics
We show the make-up of foreign capital flows, by the country of origin, year-to-date, in Figure 34. China has taken over
the lead spot with a 22% share, moving up from number three last year, and slightly outpacing Canada, which was last
years leader.
Concerns over trade barriers and protectionism could quell overseas demand, down the road. The potential
comes from both some of the President-elects stated campaign agenda and, in addition, discussion about the Chinese
government trying to impose tighter controls to stem the flight of capital offshore. One of the areas that is reportedly
targeted is property investments, by state-owned firms, of $1 billion or more.
The possibility of such policy changes bear watching. We also note that any changes would likely affect buyers, from
various geographic regions, differently. Overall, despite the rhetoric, we believe that demand from non-US property
investors is likely to remain robust, for now, and even if there are changes, they are unlikely to have a large effect on
overall demand over the coming year.
With the US market still viewed as a safe haven, some foreign investors may even try to expedite deals in anticipation of
future barriers. Furthermore, we note there is some evidence that international investors are also expanding their scope
and increasing investments beyond core assets in major markets.
Non-major markets catch up a little but still seem attractive

Non-major market price indices are up slightly more than the major market indices this year but secondary
market cap rates continue to lag the tightening in the primary markets. This makes many of the secondary
markets, although not all of them, continue to appear attractive to us, on a relative basis. Tertiary markets we
find more difficult to recommend as they lack both broad institutional investor support and have less access to financing.

To be fair, we have highlighted that secondary markets could outperform for the past few Outlooks, but the performance
has disappointed us. We believe that despite lagging in price and cap rate movements the flow of larger institutional
equity to the primary markets, who favor both the liquidity and the likelihood of lower volatility, helps to explain the lag.
We show the price performance of the major markets, versus the non-major markets, in Figure 35, using the
Moodys/RCA index. We have rescaled the indices to equal 100 at the markets peak, in 2007. The decline in the major
market index, in the beginning of 2016, helped bring the overall index down. The major market index fell over the three
month period from February to April, for a 3.2% cumulative decline. Since then, the major market index has rebounded
and is now up 5.1%, year-to-date.
Figure 35: CRE price indices in major and non-major

markets Figure 36: Cap rates by market type
140 8.5% Tertiary
Moody's - Major Markets Secondary
130
8.0% Primary
120 Moody's - Non-Major Markets
110 7.5%
100 7.0%
90
6.5%
80
70 6.0%
60
5.5%
50
5.0%
40
Q3 03
Q3 04
Q3 05
Q3 06
Q3 07
Q3 08
Q3 09
Q3 10
Q3 11
Q3 12
Q3 13
Q3 14
Q3 15
Q3 16
Q3 03
Q3 04
Q3 05
Q3 06
Q3 07
Q3 08
Q3 09
Q3 10
Q3 11
Q3 12
Q3 13
Q3 14
Q3 15
Q3 16
Source: Credit Suisse, Moody's/RCA Source: Credit Suisse, Real Capital Analytics
By contrast, the non-major index has been far less volatile and only has had one down month since the market
recovered. Even given that, the non-major markets only slightly outperformed, rising 7.3%, year-to-date.
Even with these price moves, we continue to see greater cap rate compression for the primary markets, relative to the
secondary and tertiary markets. We show the progress in cap rates, across three market segments (primary, second and
tertiary) in Figure 36. It is clear, that by this measure, the gap between the primary-based assets and those in the other
two market sectors have widened.
The stronger performance of the primary markets and trophy assets makes sense in the earlier stages of the recovery,
as these properties have not only better financing options but also more tenant appeal. However, with the real estate
markets being mid- to late-cycle, we would expect the relative value differences to attract additional capital, especially to
the best assets in the top markets of the secondary tier. Tertiary markets may continue to lag as both the ongoing
fundamental improvements and the flow of capital take longer to trickle down to these areas.
The caveat to this is if there is a larger, systemic rise in cap rates, new investments may continue to flow into the primary
markets, based on the absolute yield, as opposed to the secondary market which still might appear more attractive on a
relative basis. This leads us to once again think about cap rates in a rising interest rate environment.
Cap rates in a higher yielding environment
The recent dramatic rise in 10-year Treasury rates once again calls into question: What will cap rates and real estate
prices do in a rising rate environment? We have discussed the outlook for commercial real estate under this scenario in
each of our past three Outlooks and the conclusion today remains little changed. There are reasons to expect that the
return on commercial real estate can remain attractive even as rates rise.

The rise in interest rates is likely to halt and reverse the multi-year trend of lower cap rates that has been in
place since the commercial real estate markets started to recover. All else equal, higher cap rates and increased
borrowing costs are a negative for commercial real estate prices. That said, it has long been our view that cap rates are
not exclusively driven by interest rates.
When we look at cap rates, we often compare them to the yield on corporate bonds as a measure of the
risk premium that real estate investors are demanding versus other risky assets. This is slightly unusual as the
more traditional way is to compare them to Treasury rates. We have argued that the comparison of cap rates to Treasury
rates (a 'riskfree' asset) is less logical and at times can be misleading, giving false signals.
Instead, we prefer to compare cap rates to the yield on triple-B corporate bonds, which have a credit risk component.
We do that in Figure 37 which shows both the corporate bond yield and a long-run cap rate series. In Figure 38 we show
the difference between these two series which highlight some notable trends.
Figure 37: Cap rates compared to triple-B corporates Figure 38: The differential of cap rate and corp yields
18% 300
ACLI cap rate
16% 200
BBB Corp yield
14% 100
12% 0
10% -100
-200
8%
-300
6%
-400
4%
-500
2%
Q3 74
Q3 76
Q3 78
Q3 80
Q3 82
Q3 84
Q3 86
Q3 88
Q3 90
Q3 92
Q3 94
Q3 96
Q3 98
Q3 00
Q3 02
Q3 04
Q3 06
Q3 08
Q3 10
Q3 12
Q3 14
Q3 16
Q3 74
Q3 76
Q3 78
Q3 80
Q3 82
Q3 84
Q3 86
Q3 88
Q3 90
Q3 92
Q3 94
Q3 96
Q3 98
Q3 00
Q3 02
Q3 04
Q3 06
Q3 08
Q3 10
Q3 12
Q3 14
Q3 16
Source: Credit Suisse, ACLI, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, ACLI, the BLOOMBERG PROFESSIONAL service
For more than 20 years, the differential has largely hovered between 50 bp and 200 bp (73 out of 92 quarters), with
mid-2007 to 2009 being the bulk of the exception. Over the same time horizon, the range in cap rate differentials, to
Treasuries, has been significantly wider.
Cap rates tend to be less volatile than corporate bond yields and also tend to slightly lag their moves. As of the end of
the third quarter the differential stood at around 114 bp, in the lower part of the range. However, this does not account
for the move in corporate yields over the past few weeks. If Treasury rates and corporate bond yields dont retrace, or
continue their move higher, we would expect cap rates to rise over the coming quarters. Even with rates moving higher,
our triple-B corporate yield is still around 50 bp lower than it was for most of the period from August 2015 to
March 2016.
Even this analysis is too simple and the relationship between interest rates and cap rates is far more complex with a
whole host of other factors at play including financing rates, available leverage and cash flow growth.
Furthermore, cap rate increases accompanied by economic expansion and improved property performance
are less worrisome. Realized and expected increases in cash flows will also encourage property buyers to pay more.
For reference, an increase in cash flows of 2.5% a year, for three years, negates a 50 bp rise in cap rates, from todays
average level, on property values.
NCREIF shows NOI growth has averaged about 5.4%, over the past year, and has averaged an annualized rate of
5.3%, over the past three years. We previously estimated that CMBS cash flows rose 3.2% in 2015 and had a similar
gain over the first half of 2016.

We analyzed how commercial real estate has performed during prior rate rises, over the past 40+years, in
Figure 39. We used a move of 100 bp or more, from trough to peak, in the 10-year Treasury rate as a trigger. Over
this time period we found nine such periods. Cap rates rose in only four of the nine periods and the rise, in each case,
was far less than the move in the Treasury rate. We only had a price index (we used NCREIF) for the last seven of the
periods analyzed but this index only indicated one drop in prices in these examples (when rates rose between early 2009
and early 2010).
Figure 39: Historical CRE performance during 10-year rate increases

Rate rise 10yr UST Cap Rate NCREIF Price Index
18% 540
16% 480
14% 420
12% 360
10% 300
8% 240
6% 180
4% 120
2% 60
0% 0
1975 Q1
2011 Q1
1970 Q3
1979 Q3
1984 Q1
1988 Q3
1993 Q1
1997 Q3
2002 Q1
2006 Q3
2015 Q3
Source: Credit Suisse, NCREIF, ACLI, the BLOOMBERG PROFESSIONAL service
Even as CMBS issuance fades other financing remains intact

Although CMBS origination has waned this year, the overall supply of financing, flowing to the commercial
real estate market, remains healthy. That dynamic seems likely to continue into 2017, in our opinion. This is
important as we have long argued that a well-functioning financing market was critical for commercial real estate
performance. The lack of financing and leverage, during the 2008 to 2009 downturn, exacerbated the fall in real estate
prices. As a result, we believe it is important to understand the changing dynamics of this lending market, both as it
relates to CMBS issuance but also more broadly, because of the impact it has on commercial real estate pricing.
Risk retention remains a bit of an unknown but, as we discuss below, we believe enough progress has been
made that the upcoming start date will not cause a huge disruption to the overall lending markets or to
CMBS.
There are also some shifts in the lending environment, away from the implementation of risk retention, that are worth
noting. These include the change in leadership among commercial mortgage lenders and the recent tightening in lending
standards, by banks. None present an immediate concern in our view but further changes in the landscape are certainly
worth monitoring.
Total lending to the industry in 2016 seems very close to being on par with last years pace. One indicator of the recent
level of financing can be seen in the Mortgage Bankers Associations quarterly lending index, which we show in Figure
40.

Figure 40: Loan origination kept pace in the first half and picked up slightly in Q3 2016
450 MBA Origination Index
$508 $504
$406 $400
Yearly avg $359
400
$244
350 $181
289 $184
300 261
$119
207
242
250 226
$82
200 165 170 181
148
150 108 119
100 73
54
50
0
Q3
Q1
Q4
Q2
Q3
Q1
Q2
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q2
Q3
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 '16
The index is benchmarked such that 100 equals the average origination quarter in 2001.The line represents the four quarter moving average.
Amounts shown in billions of dollars are actual origination numbers. The bars reflect the varying levels of the index.
Source: Credit Suisse, MBA
The index shows that in the first half of 2016 overall lending was close to flat versus the prior year. Lending picked up
slightly in the third quarter, both on an absolute basis and relative to the year earlier period. We have also overlaid a four
quarter moving average of the index, which eliminates the seasonality issue and shows the trend more clearly. The
industry group estimates that the index equated to about $504 billion of lending last year and we would expect a similar
amount, to maybe a touch higher, once this years tally is completed.
While the overall lending total may prove similar, versus last year, the breakdown, across the various
lending platforms continues to shift over time. We show the breakout of the index, by lender type, again using a
four quarter moving average, in Figure 41. Three of the four lending groups have been mostly on the rise this year, with
the lone exception being the CMBS market.
Figure 41: Bank and GSE lending activity has notably increased over the past few quarters
600 Conduits
Commercial banks
500 Life company
FNMA/FHLMC
400
Index 4Q Average
300
200
100
0
Q4
Q1
Q2
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 '16
The index is benchmarked such that 100 equals the average origination quarter in 2001.The line represents the four quarter moving average.
Source: Credit Suisse, MBA

Bank lending has been on a sharp upswing since early 2015, although the moving index measure dropped slightly in the
third quarter. The GSEs also continue to lend aggressively while life insurance companies have been on a consistent, but
perhaps less dramatic rise. Data from the ACLI indicate life insurance company lending was up over 9% in the first half
of the year, compared to the prior year.
Just as important as the amount of financing available are the loan terms and leverage being offered to borrowers. All
else equal, investors who are willing to apply greater leverage will be able to increase their returns and hence should be
willing to pay more for a property.
We see some signs that, after years of loosening leverage, there has been a slight shift toward tighter
standards. Credit parameters are no longer being relaxed and there are signs that they may have started to tighten. We
discuss the leverage in CMBS conduit deals and how average credit metrics have stabilized to improved in our credit
section. In June, the OCC made mention that banks were easing standards in several lending areas, including
commercial real estate, among others. It highlighted less-restrictive loan covenants, extended maturities and longer
interest only periods. This followed an interagency statement, at the end of last year, that highlighted rising CRE loan
concentrations and an easing of underwriting standards.
We believe that much of the growth in bank lending, that has sparked these concerns, are in development loans and, to
some extent, from multifamily mortgages. As we noted above, in discussing construction trends, the biggest tightening
of standards has been in these two sectors with fewer banks tightening standards on traditional CRE loans (see Figure
14 above). Nevertheless, these tightening trends are still worth following.
Risk retention fears fading; 2017 issuance at $65-70 billion

A consistent flow of new issue CMBS is not only a part of the overall financing landscape for commercial real estate but
we would argue it is essential to maintaining an active and vibrant CMBS market. CMBS issuance has fallen this year
and has been impaired by several factors including an increased regulatory burden, placed on dealers and originators.
The upcoming implementation of the new risk retention requirements imposes additional regulatory constraints for the
sector and has the potential to impair CMBS origination even further.
Risk retention will cause changes but nothing catastrophic, right off
While we have some concerns about how big an impact the risk retention requirements will have on CMBS
issuance and the market in general, over the longer-term, we believe that enough progress has been made
to eliminate, or at least severely reduce, the chance of a large market disruption, over the near-term.
Several test risk retention-compliant deals have been floated already, including three conduit deals and one single-
borrower transaction that have priced, with more coming. These deals provide us and we believe the market with some
comfort that the new rules will not completely stymie issuance, once we pass the deadline on December 24.
To date, all of the priced conduit deals testing risk retention have used a vertical retention format but we believe other
structures will eventually be tried, in the new year. This may include the use of the third-party horizontal slice and
perhaps even an L-shaped arrangement. Some of these options could also be conceivably combined with financing,
further increasing the demand and the opportunities. Logistics around the horizontal piece are reportedly still being
negotiated and several entities continue to work on fund raising to invest in these securities.
Even if these other formats are not employed, as the vertical strip is arguably the most economical and logistical
solution, for the issuer, we believe that at the very least we will see an increase in the coming months of a number of
such sponsors that take this approach.
One of the difficulties that have obstructed progress on these various structures has been the lack of clarity on how
certain provisions of the regulation should be interpreted. For example, there are even uncertainties, with respect to the
regulatory treatment, of the vertical slice on the test deals that have come. If these retention pieces can be accounted
for as a loan, rather than a single security, that would increase the relative economic benefit of using this structure and
could expand the use by market participants.

All of this does not mean that risk retention is unimportant or will not affect the market. To the contrary, we
see several changes as a result of the new rules.
First, it will likely affect the timing of issuance over the course of 2017. The increased uncertainty, as the new
deadline for meeting the requirements approaches, has likely slowed the origination process for many lenders. In
addition, it has led dealers to pull transactions forward, to clear their books, before the deadline. This likely means a
dearth of new deals to start the year and we would expect the calendar to be light in January and early-February. This is
similar to the pattern we had in 2016, but for a very different reason.
Risk retention is likely to further increase spread tiering between conduit deals. The risk retention test deals
that have come have been well received by the market and priced at tighter spreads. We would argue that, on some of
the deals, the relative spread may be too tight, given the actual credit. Nevertheless, the market is clearly treating these
deals differently. We may see spread differentials increase based not only vintage (pre- versus post-compliance) but also
on the type of risk retention structure that is employed. Arguably some loans may work better, from an economic
standpoint, under one retention setup than in another. Some structures could arguably more effectively employ higher
quality loans while others may need to have a larger concentration of higher yielding mortgages. We can see how this
could not only affect average credit metrics but also the prevalence of barbelling, across the vintage, and increased
differentiation between deals.
Difference in deals and further spread tiering would also lead to increased opportunities from a relative value perspective.
We further note that the reduction in tradeable float (due to the 5% retention option needing to be retained) also has
relative value implications, in our view. In addition, deals that are structured to meet EU risk retention compliance may
see additional demand from European investors.
There is an argument to be made that the number of CMBS originators may shrink next year, curtailing issuance. As risk
retention structures evolve, over time, we believe that solutions will emerge for some of the smaller originators to remain
participants in the market. Even if this does not come to fruition, the loss of players should be disproportionately
weighted toward the smaller originators and the larger ones could arguably pick up most of, if not all of, the slack, at
least to start.
Lastly, we also think there is the consideration that some or all of the Dodd-Frank legislation, the regulation
that mandated the risk retention rules, gets overturned or at least softened. President-elect Trumps transition
website indicated that his team would be working to dismantle the Dodd-Frank Act and replace it with new policies to
encourage economic growth and job creation. At this point we believe it is far too difficult to handicap the likelihood, the
potential timing and the magnitude of any changes but these all should be clearer over time.
Gross issuance to be nearly unchanged at $65 billion to $70 billion
We believe that 2017 private label CMBS issuance is likely
Figure 42: Quarterly private label issuance by
to be in the neighborhood of $65 billion to $70 billion. This vintage and quarter
would place the total very close to, but a little bit below, the $77
billion we think is likely for all of 2016. Our estimate is based on 35$bn 2012 2013 2014 2015 2016
several factors including what we believe could be a small rise in
the market share for CMBS, coupled with transaction volume that 30
is down only slightly from this years pace. Private label issuance 25
should be relatively slow to start the year as the soon-to-be- 20
imposed implementation of a risk retention requirement pulled
issuance forward toward the end of this year and left originators 15
with light loan books. To this point, private label issuance ramped 10
up following the decline in the second quarter of this year (Figure 5
42). We expect issuance in Q4 to total around $27 billion (about
$108 billion annualized), slightly outpacing the $26 billion of 0
Q1 Q2 Q3 Q4
issuance in each of the same quarters in 2013 and 2014.
* 2016Q4 is expected issuance based on deals that have priced and the
current pipeline
Source: Credit Suisse, Commercial Mortgage Alert

We expect Agency CMBS could add an additional $140 billion of issuance in 2017, up from the roughly $130
billion total we expect this year. We expect Fannie and Freddie multifamily issuance to rise roughly 10% next year,
SBA originations to stay on track and a slight decline in project loan issuance.
We have long maintained that while there is a lot of focus on gross issuance projections, and estimating makes for a fun
guessing game, the actual importance maybe overstated. Net issuance, which we discuss further below, is more
important for the determination of spreads, even if it is far less debated, in our view. This year is a good example about
the relationship between issuance and spread performance.
We would argue that the direction of spreads, especially at the start of the year, was a bigger factor in
determining origination volume, than issuance was in dictating spreads. CMBS spreads widened at the start of
the year, due to an increase in macro-volatility and a global financial selloff, not because issuance was running above
expectations. The environment made it difficult to profitably originate loans and curtailed new issuance. Issuance
projections, our own included, well overestimated gross supply this year. We saw many market watchers race to lower
their forecast early in 2016, only to then way undershoot the eventual total.
The real value from the supply estimation exercise comes from thinking about the factors that are affecting the market
and what these might mean for CMBS performance.
Transaction volume and market share are two key drivers of issuance
When thinking about the coming years issuance we focus most heavily on overall CRE transaction volume,
coupled with CMBS market share. While the quantity of maturing loans is also a factor, we believe that many
forecasters give this variable too much weight in their estimation process. One has to look no further than 2016 to see
this; loan maturities were higher in 2016, than the prior year, yet CMBS origination volumes took a dive as market share
and transaction volume fell.
Of course the drivers of the demand for financing are not independent. For example, we believe the economic cycle is
important as is the health of the real estate markets (which we discussed above) but these also affect things such as
transaction volumes and mortgage rates.
We view the market share of CMBS as a key variable

We incorrectly thought that market share had bottomed toward the end of 2015 and would remain stable for 2016 but
this did not happen. Instead, the market share continued to plummet and hit a just 9% in the first half of the year, as we
show in Figure 43.
While we do not have a tally on the second half numbers, it would Figure 43: CMBS originators market share
appear there was a slight rebound as macro-market volatility dropped to 9% in 1H 2016
subsided. Not only do we see relatively higher CMBS issuance in 30% 28%
the second half, but other factors also point to CMBS increasing its 25%
position among commercial mortgage lenders, such as the MBA 25% 23%
index we discussed above. In addition, the numbers would suggest 21%
19%
20%
that banks, which account for the largest portion of new loans, are 16%
17%
now growing its commercial mortgage books more slowly as they 15%
12%
has tightened lending standards. 9%
10%
For 2017, we believe that the CMBS market share could
rebound, back to 15%. We see the biggest downside risks to 5% 3%
our gross supply forecast as a return of macro-oriented volatility,
that squashed CMBS origination in the first part of 2016, and risk 0%
1H '15
2H '15
1H '16
2009
2010
2011
2012
2013
2014
2015
retention, if the implementation does not go as smoothly as we

think it might.
Source: Credit Suisse, Real Capital Analytics

Transaction volume begets origination

We believe that the volume of commercial mortgage originations has historically been highly correlated with
transaction volume. The logic is simple: most real estate transactions are financed and the volume of CRE trades
generally outpaces the amount of loans set to mature, even in a year where maturities are high. In addition, many of the
properties backing maturing loans are sold so transaction volumes already encapsulate a portion of the maturing loan
financing need.
Through the first three quarters of this year, US transaction volume totaled $352 billion, down about 7% versus the
same period last year, according to Real Capital Analytics. We show that after several years of rising transaction volume,
the pace of new deals has started to level off (Figure 44). We also overlay the MBA index for lending volume to highlight
the high correlation.
Figure 44: Transaction volume is highly correlated with total origination levels
$bn
Transaction volumes MBA Origination Index (right-axis)
200 400
180 350
160
300
140
120 250
100 200
80 150
60
100
40
20 50
0 0
Q3 05
Q1 06
Q3 06
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
Q1 15
Q3 15
Q1 16
Q3 16
The MBA index is benchmarked such that 100 equals the average origination quarter in 2001.The line represents the four quarter moving average.
Source: Credit Suisse, MBA, Real Capital Analytics
While we do not have a prediction, or reliable model, for transaction volume, all of the signs seem to indicate that this
should be relatively steady to down slightly, over the coming year.
Refinancing and maturing debt should contribute as well
While we argue others place too much emphasis on the relationship between upcoming loan maturities and issuance,
we acknowledge that it and prepayments are influential factors.
Our estimate is that $87 billion of non-defeased conduit loans are set to mature in 2017, versus $91 billion this year. In
addition, we see about $18 billion of CMBS outside the conduit world slated to mature in 2017. However, a large
portion of that non-conduit amount may wind up not paying off next year, as many of those borrowers will exercise their
embedded extension options. As we discuss further, in the credit section, we believe the successful payoff rate will be
robust, although down from the prior few years.
In addition to loans coming due next year, prepayments of loans slated to mature past 2017 also need to be considered
into the amount of debt that may be refinanced next year. We expect, however, there will be less of a pull forward effect
in 2017, in dollar terms, as the pool of maturing loans in future years dips considerably. As a result we expect fewer
2018+ maturing loans to defease or prepay and so overall CMBS loan payoffs will be less of a driver for new financing
demand than in years past.
Not all of these CMBS maturities will be refinanced back into CMBS but, at the same time, not all new CMBS loans
were previously securitized either. We estimate that about 43% of conduit loans, issued this year, were refinanced from
an existing CMBS loan.
Wont higher rates dampen demand for commercial real estate financing?
A concern that may weigh on estimates is the effects from a higher rate environment. Higher borrowing rates, it is
argued, could make real estate a less attractive investment and damper the demand for financing. We discussed earlier
how we thought that even in a higher rate environment, commercial real estate would still perform well and we do not
believe a gradual rate rise, from todays level, will curb financing demand. Lending volumes can be robust even when
rates rise. For example, it is hard to argue that rising rates hurt CMBS securitization volume between 2005 and 2007.
Conduit supply should be about $40 billion to $45 billion

As hard as it is to forecast total supply, it is even more difficult to accurately estimate the breakdown by deal type.
The proportion of conduit issuance, over the past few years, has been relatively steady, accounting for around 60% of
the total. We could see that potentially rising next year, to a small degree, if the trend toward increasing use of pari
passu loans, across conduit deals continues.
Given this we estimate that conduit issuance should be in the neighborhood of about $40 billion to $45 billion, with the
remainder distributed between other deal types. We would expect the lions share of the non-conduit deals to be single-
borrower deals, just as has been the case over the past several years.
Agency issuance should continue to grow

For next year, we expect Agency CMBS issuance to
further increase, reaching about $140 billion, a Figure 45: Agency CMBS issuance
roughly 7% increase from the $130 billion expected $bn Total issuance REMIC issuance
for this year. We forecast the REMIC portion of issuance 160
in 2017 to total about $90 billion, of which $80 billion will 140
be through the flagship programs (K-deal, FNA and GNR 120
shelves) and the remainder as Freddie SBL, SBA and SBIC 100
(Figure 45). 80
We believe next years increase in issuance will mostly 60
come from Fannie Mae and Freddie Mac, as the programs 40
continue to expand. While the FHFA left the 2017 lending 20
caps unchanged, at $36.5 billion for each Enterprise, the 0
Agency notes that it will review its estimates of the 2010 2011 2012 2013 2014 2015 2016 2017
est proj
multifamily loan origination market size on a quarterly basis
in 2017 and adjust the caps if necessary. * Total issuance is of DUS, Freddie K & SBL, SBA 7(a), SBAP, SBIC and GN PL
** REMIC issuance is of ACEs, Freddie K & SBL, SBAP, SBIC & GNR.
Source: Credit Suisse, Freddie Mac, Fannie Mae, Ginnie Mae, BNY Mellon,
Net supply will continue to contract but pace should slow in H2 17

CMBS net supply to fall again
As we mentioned above, we believe that net supply is far more important than gross supply, on its impact on CMBS, at
least from a sector performance standpoint. Over the past twelve months we calculate the outstanding balance of the
CMBS universe fell by approximately $73 billion, significantly more than we initially forecasted, as new issue undershot
our target.
We believe net CMBS outstanding will continue to fall in 2016, in the neighborhood of $30 billion to $35
billion, across the CMBS universe. Given our gross issuance and payoff expectations for next year, we believe
conduit net issuance could total around negative $45 billion while, on the other hand, the outstanding amount of non-
conduit transactions could increase by $10 billion to $15 billion.

Non-conduit transactions could see an increase in net supply this year as gross issuance continues at a
similar pace to last years, offsetting prepayments and maturities. We expect there will be approximately $20
billion of single borrower transactions this year with another $10 billion split between multi-borrower floater deals and
other non-conduit deals. Of the single-borrower and floater transactions, net supply has been relatively flat this year
(Figure 46).Next year may see a similar amount of gross issuance with slightly fewer paydowns.
Figure 46: Non-conduit outstanding increases Figure 47: as the conduit universe shrinks further
$bn Floater $bn Conduit - Legacy
110 800
Single Borrower Conduit - Post Legacy
100
700
90
80 600
70 500
60
400
50
40 300
30 200
20
100
10
0 0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
The path of the outstanding balance of conduit transactions has been markedly different and will continue
to evolve in 2017. New conduit issuance has failed to keep pace with the rapid pay downs and liquidations on the
legacy side (Figure 47).
Not only has the outstanding balance of the legacy conduit universe continued to decline, falling another $91 billion (or
40% of the total) year-to-date, through October, but the pace of the decline accelerated, over the course of the year.
For 2017, we expect further large and rapid paydowns in the legacy conduit universe but the total decline,
over the full year, should be far less as the pace slows dramatically in the second half of the year. About two-
thirds of the legacy 2017 maturities occur in the first half. The universe will continue to shrink in the second half
(through additional payoffs and liquidations) but the velocity is bound to slow.
There will be some pay downs as well in the post-legacy conduit market as some loans are set to mature (about $2.6
billion) and we expect additional loans in these cohorts to prepay or defease. However, the post-legacy outstanding
balance should still increase, just by a smaller amount than the legacy universe is paying down.
Legacy credit responds to maturities;

Post crisis deals should see a small updraft in problem loans
Our assessment of the economy and commercial real estate performance leaves us with a relatively
positive outlook on CMBS credit. Despite this, there are factors at work, both on the legacy and new issue side, that
may lead to swings in the headline delinquency rate, depending on the portion of the universe being analyzed.
Understanding these forces allows market participants to see through the noise and get to the root of CMBS credit
performance.
While there are clearly certain factors that affect both legacy and more recently issued loan performance there are other
factors that are profoundly different. We generally break out the analysis of conduit credit into legacy and recently issued
sectors and we do so in this section as well.

We have seen others that choose to naively combine the two sectors but we believe this is a mistake. Doing so can
mask the trends that are actually taking place. Fully understanding the universe being discussed is a necessity to
comprehending true credit performance. More specifically, looking at an overall delinquency rate without knowing what is
behind it can be misleading, especially in an environment when the size of the universe is changing.
The legacy conduit delinquency will continue to rise; should we care?

The denominator effect remains a powerful force for legacy delinquencies
For several years we have discussed what we have called the denominator effect as it relates to the CMBS
delinquency rate. At issue is the amount of delinquent loans outstanding (the numerator) is falling less rapidly, relative to
the amount outstanding (the denominator), pushing the overall rate up. In a simplified example, assume from one month
to the next no conduit loans change their delinquency status but several current loans mature and pay off. The
delinquency rate will actually rise. While the profile of the remaining universe has arguably gotten worse, it is hard to say
credit deteriorated. Generally, if the rate of pay downs is relatively faster than the rate of resolutions (cures and
liquidations) the legacy delinquency rate will rise regardless of the pace of new delinquencies.
The denominator effect to a large degree explains the large rise in the legacy CMBS delinquency rate (and
the overall delinquency rate) that has occurred this year. To put some numbers to this, over the past year there
has been a sizeable reduction in the universe of problem loans. The balance of 60+-day delinquencies fell over $4
billion, a 16% reduction. However, the balance of the legacy universe fell nearly three times more, on a percentage
basis, dropping 44%. This led to the rise in the legacy delinquency rate shown in Figure 48.
Figure 48: The legacy 60+-day dlq rate has

increased as the outstanding balance has declined Figure 49: Delinquency rates rise close to maturity
16% 60%
15.7% 2001
15% 2002
50%
2003
14%
2004
40%
13% 2005
2006
12% 30%
11%
20%
10%
9% 10%
8% 0%
Apr-15
Apr-11
Apr-12
Apr-13
Apr-14
Apr-16
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
24
48
12
36
60
72
84
96
0
156
108
120
132
144
Months

The effect becomes extremely pronounced on seasoned vintages that are

facing maturities. As loans approach their maturity date, the better loans Figure 50: 2007 vintage 60+-day
pay off and the worse loans stay in the pool or fall delinquent; the balance delinquency rate
drops and the delinquency rate soars. 15%
Vintage 2007
We look at the delinquency rate of the 2001 to 2006 vintages, based on 13%
seasoning, in Figure 49.
11%
We anticipate the 2007 vintage (which currently backs about 73% of the 7.4%
legacy balance) will follow the same path. In fact, as Figure 50 shows, we 9%
have already seen the 60+-day delinquency rate, for the 2007 cohort, 7%
tick higher, over the past few months. Given this, it is easy to see how the
rise in that vintages delinquency rate will drive the overall headline 5%
statistic higher, especially with the legacy balance likely to fall by another 3%
two-thirds, over the coming year.
10/13
04/16
10/12
04/13
04/14
10/14
04/15
10/15
10/16
Looking at delinquencies from a balance perspective

Given this, we think it adds value to look at legacy delinquencies on a Figure 51: Dollar amount of 60+-day
dollar basis as well as a percentage basis. 60+ day delinquencies, as delinquent legacy conduit loans
noted above have declined by about $4 billion over the past 12 months, 60-day 90+-day
$bn
after falling a little over $4 billion in the previous 12 month period. 60
FC REO
Non-perf mat
We show the dollar amount of delinquencies, by category, over time in 50
Figure 51.
40
The REO bucket has, on net, declined over the period, falling by more 30
than $6 billion. There has been some rise in the more severe delinquency
buckets (90+-day and Foreclosure) by about $600 million. The biggest 20
rise, not surprisingly, has been in the matured non-performing bucket 10
which increased by nearly $1.5 billion, over the past year.
0
Jul-09
Jul-14
Jan-07
Jan-12
Mar-11
Mar-16
Nov-07
Sep-08
Nov-12
Sep-13
May-10
May-15
Over the next year we would expect similar directional moves, as more
progress is made on the REO loans, but the hefty slate of 2017
maturities likely adds pressure to the non-performing bucket.
Liquidations should continue at a slightly slower pace Source: Credit Suisse, Trepp
as loss severities fluctuate

Given the large set of loans still delinquent, with many in REO, we expect liquidation of legacy loans to
continue at a brisk pace. While there should be more volatility in the month-to-month amount, another $10 billion or
so could be liquidated during 2017.
During the first 10 months of the year there were $12.9 billion in loans liquidated. This was actually higher than in the
same period in 2015. However, nearly half of this total was liquidated in January alone, including the large $3 billion
Stuyvesant Town loan, as well as other assets that were part of a large CW Capital bulk sale.
More recently, liquidations have been averaging around $800 million per month, although there was a pick-up, back to
$1 billion in October.

The loss severities on true problem loans have ticked slightly

higher, over the past year, and we may see these loss Figure 52: Conduit loss severities
percentages continue to inch up (Figure 52). Surprisingly, the Ex-low loss
70%
headline severity, on all losses, has risen less and been relatively more All loss severity
stable. This is the opposite of what normally occurs. 60%
We view the rise in severity as a function of the remaining pool of 50%

loans that are already credit impaired and are now being
liquidated, not due to any underlying deterioration in credit. 40%
Loans that take longer to be liquidated generally have higher loss 30%
severities. The average time in special servicing for liquidated loans has 20%
been steadily rising (Figure 53). We believe this goes a long way in
explaining the recent rise in average severities. 10%
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
When we look at the remaining delinquent loans in special (Figure 54) we
see that there is a portion (about one-third) that represent recent additions
(mostly non-performing matured) but the rest of the buckets continue to
age. More than one-quarter of the total have been there for more than
four years.
Figure 53: Average time in special servicing for Figure 54: More than 25% of the legacy delinquent
liquidated loans loans have been in special for over four years
# months
60 60-day 90+-day FC REO Non-perf mat
35%
50 30%
40 25%
30 20%
15%
20
10%
10
5%
0
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 0%
0-11 12-23 24-35 36-47 48-59 60+
2012 2013 2014 2015 2016 # of months in special
Maturity defaults have historically had lower loss severities than defaults during the term. While that continues to be the
case, we have seen a rise in the maturity default severities. This, plus a greater percentage of maturity defaults, has also
likely contributed to the overall loss severity rising.
This mix of loans primed to be liquidated is likely to be the driver of loss severity trends over the coming year.

Consistent liquidations is increasing life-to-date losses

With liquidations staying constant, and the slight uptick in severities, as problem loans get flushed through
the pipeline, we expect to see further increases in the life-to-date losses of later vintage legacy cohorts. We
show the vintage level losses on both a life-to-date basis, as well as over the prior 12-month period in Figure 55.
Figure 55: Life-to-date realized losses and losses accumulated over the past 12 months, by vintage
Life-to-date Last 12 Months
Liq loans Liquidated Loss Ex-low Liq loans Liquidated Loss Ex-low
Orig bal Cur bal orig. bal (% orig (% of orig Loss Loss orig. bal (% orig (% of orig Loss Loss
Vintage ($mn) ($mn) ($mn) vintage bal) bal) sev. (%) sev. (%) ($mn) vintage bal) bal) sev. (%) sev. (%)
Pre-2004 272,530 2,744 27,978 10.3% 3.6% 30.2% 45.1% 493 0.4% 0.1% 35.8% 51.3%
2004 74,050 2,404 7,356 9.9% 3.4% 29.3% 47.2% 893 2.5% 0.6% 48.7% 50.0%
2005 136,570 6,549 19,758 14.5% 5.0% 30.6% 40.9% 2,474 3.2% 0.6% 33.9% 45.6%
2006 161,929 18,687 28,301 17.5% 7.3% 37.8% 46.2% 6,165 2.6% 1.1% 28.5% 39.6%
2007 189,279 99,830 37,257 19.7% 7.2% 33.9% 39.1% 6,688 0.7% 0.9% 25.6% 40.8%
2008 10,707 6,185 2,266 21.2% 11.2% 48.2% 41.7% 690 0.0% 3.5% 53.8% 29.5%
Total 845,065 136,400 122,915 14.5% 5.4% 33.4% 42.8% 17,403 1.8% 0.6% 30.4% 40.9%
* As of October 2016
The entire legacy conduit universe took an additional 63 bp of loss (based on the original balance) over the past 12
months, bringing the life-to-date losses to 5.4%. The rise was only slightly greater than the rise in the prior year. As the
pool of delinquent loans continues to be dealt with, we expect to see further rises, especially in the 2006 and 2007
vintages. Given the pool of loans that is left, we would anticipate that the 2006 vintage eventually reaches the 10%
cumulative loss level, while the 2007 vintage breaches that threshold.
2017 maturity refis not as strong, but we remain relatively sanguine

Despite the markets concerns, we have remained relatively sanguine about the oncoming wave in loan
maturities. As the wall of maturities has shrunk over time, and the recent maturities have not caused a major disruption,
it appears the consensus has moved closer to our view.
However, as we enter the last year of large legacy maturities, the loans coming due are relatively more levered than
those due in the prior few years. The results bear monitoring as the outcomes will impact legacy relative value.
By our count approximately 79% of the legacy conduit loans that came due in the first ten months of 2016
paid off successfully with 74% paying off on time. The full year total could creep a little higher, in the coming
months, as we often see some payoffs a couple of months post-maturity. The total is in line with the high-70% range
we forecasted in last years Outlook and our updated 80% mid-year forecast.
For 2017, we estimate that, across the CMBS universe, there is currently $87 billion of non-defeased conduit loans
scheduled to mature (Figure 56), of which $84 billion are legacy loans (Figure 57). On top of that, there is another $18
billion of loans backing single borrower and floater deals, due next year. Nearly all of these loans have extension options
and we expect a large portion of these borrowers will exercise these.

Figure 56: Maturity profile by deal type Figure 57: Conduit maturity profile by vintage type
$bn Conduit Floater Single Borrower $bn Legacy (Pre-2009) Post legacy (2009+)
100
100
87 90 87
90
80
80 71
70
70
60 57
60 55 51
47 50 42
50
37 40
40 33 34 27
28 30 23 25
30 24 26 20
20 12
20 16 11 11
10
10 4
0 0 0
0
* 2016 maturities and past due loans * 2016 maturities and past due loans
** Fully extended maturities are used for floater and single borrower deals Source: Credit Suisse, Trepp
For the 2017 legacy maturities, we are projecting a slight decline in the refinancing rate to the low-70%
area. This is down from the 2016 experience we discussed above. Our forecast comes from a rubric we
developed a few years ago and have continued to enhance, based on two factors: debt yield and an anticipated
DSCR2. The approach has, so far been reasonably
accurate. Figure 58: Monthly non-defeased legacy conduit
maturities
Our 2017 estimate is about 3% lower than our prior $bn
estimate, in May, and consistent with our estimate from a 20 Curr
year ago. This should not be surprising as we have seen
PSS/30+
many loans from these vintages already defease or 15
Prev Matured *
prepay. While this lowers the total amount due, there is
likely some adverse selection, with the better quality loans 10
leaving the universe, lowering the forward prepay rate,
and making the remaining balance slightly more risky. 5
We also note, as we show in Figure 58, that the legacy
maturities are front loaded with two-thirds of the total 0
Jul-17
Sep-17
Jan-18
Jan-17
Mar-17
Mar-18
Nov-16
Nov-17
May-17
occurring in the first half of the year. May-18
Post legacy conduit credit

* Loans past their maturity date. Trepp increments their maturities each month to the
We believe it is likely that we will see an following month for modeling purposes.
acceleration of post-legacy credit problems in 2017
but still expect deals to perform well, on the whole. The increase is likely to come from slowing real estate
market fundamentals and price appreciation, coupled with expected performance as deals season.
There has been an increase in post-legacy conduit delinquencies, over the past year, but these have for the most part
been in line with our expectations. Delinquencies, across conduit deals, issued after 2010, have a 30+-day delinquency
rate of 30 bp ($737.3 million out of $267 billion outstanding), as of the October remittance period. This is up from a
rate of 13 bp a year ago. The rate saw a fairly consistent rise in the first half of the year but has largely leveled off in the
last few months.
2
We most recently discussed our methodology and forecasts in the November 10, 2016 CMBS Weekly.
In addition, there is another $728 million (29 bp) of loans that are performing but with the special servicer. We show the
breakout by vintage year and delinquency category, in Figure 59.
Figure 59: Newer vintage problems by cohort and category

Performing Spc. Serv 30-day 60+ Total PSS or Dlq
Vintage Pct Bal ($mn) Count Pct Bal ($mn) Count Pct Bal ($mn) Count Pct Bal ($mn) Count
2010 0.00% 0.0 0 0.00% 0.0 0 0.48% 15.3 2 0.48% 15.3 2
2011 0.60% 94.6 6 0.00% 0.0 0 0.75% 118.7 6 1.35% 213.2 12
2012 0.14% 41.4 5 0.00% 0.0 0 0.36% 102.9 11 0.50% 144.3 16
2013 0.45% 226.1 10 0.00% 0.0 0 0.32% 161.7 20 0.77% 387.7 30
2014 0.01% 6.5 2 0.08% 44.0 4 0.46% 256.8 30 0.55% 307.3 36
2015 0.58% 359.4 10 0.01% 3.8 1 0.06% 34.1 5 0.65% 397.2 16
2016 0.00% 0.0 0 0.00% 0.0 0 0.00% 0.0 0 0.00% 0.0 0
Total 0.29% 727.9 33 0.02% 47.8 5 0.28% 689.5 74 0.59% 1,465.1 112
Some progression in delinquency and specially servicing rates of troubled loans is natural and to be
expected, as the slightly seasoned vintages age. To get a sense for how this can develop over time, we derived
seasoning curves from the legacy vintages, over the first few years of a loans lifecycle. To develop this curve we took
the average rate of loans that are delinquent, or are in special servicing, across each legacy cohort, for each period, as it
aged. We excluded from this calculation any data past the calendar date of January 2008, as we wanted to capture
seasoning over a normal cycle and not over periods of stressed economic difficulties.
This average seasoning curve for the legacy deals is shown by the heavy blue line in Figure 60. We have also overlaid
the post-legacy delinquency/performing special servicing rate, for each vintage to compare it to. Because the front part
of the history is difficult to see on this scale we zoomed in on the first three years in Figure 61.
Figure 60: New issues are performing well Figure 61: compared to previous vintages
4.0% WA Dlq/PSS for pre-crisis vintages 1.4% WA Dlq/PSS for pre-crisis vintages
3.5% 2011 2011

1.2%
3.0% 2012 2012

1.0%
2013 2013
2.5%
2014 0.8%
2014
2.0%
0.6%
1.5%
1.0% 0.4%
0.5% 0.2%
0.0% 0.0%
0 12 24 36 48 60 0 6 12 18 24 30 36
Month Month
While still early into their respective life cycles, we thought it interesting that relative to our historic
seasoning curve the more recent vintages have performed comparatively worse: We show the 2013 to 2015
performance in Figures 62 through 64. To date, the 2016 cohort had one 30-day delinquency but it was a pari passu
loan and none of the other pieces were reported as 30-days past due.
Figure 62: 2013 Dlq/PSS rate Figure 63: 2014 Dlq/PSS rate Figure 64: 2015 Dlq/PSS rate
4.0% WA Dlq/PSS for pre-crisis 4.0% WA Dlq/PSS for pre-crisis 4.0% WA Dlq/PSS for pre-crisis
3.5% vintages 3.5% vintages 3.5% vintages
2013 2014 2015
3.0% 3.0% 3.0%
2.5% 2.5% 2.5%
2.0% 2.0% 2.0%
1.5% 1.5% 1.5%
1.0% 1.0% 1.0%
0.5% 0.5% 0.5%
0.0% 0.0% 0.0%
0 12 24 36 48 60 0 12 24 36 48 60 0 12 24 36 48 60
Month Month Month
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
The series of charts highlight a couple of key points to us that are instrumental in thinking about how recently issued
credit performance will unfold next year.
First off, the historic experience indicates that it is very likely that we will see some small increases in the
post-legacy delinquency rate over the coming year, as these loans continue to season.
Second, as underwriting deteriorated through 2015, loans Figure 65: Pari passu loans in conduit CMBS
have become more susceptible to any downturn either at the
% of issuance
property or market level. 50%
Lastly, we believe that the increased use of pari passu loans, 40%
throughout the conduit universe, has reduced cohort level
diversification and made the statistics more prone to 30%
idiosyncratic risk. About 42% of issuance in 2016 has been
comprised of pari passu loans, about 18 percentage points 20%
greater than 2015 (Figure 65). The trend toward splitting
10%
loans across multiple deals increased throughout the year,
after eight straight quarterly increases. 0%
Increased pari passu loans is only one aspect of the changes 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
in new issue credit that we have seen develop over the last 2011 2012 2013 2014 2015 2016
few quarters. * 2016Q4 is quarter-to-date
Risk retention contributing to changes in new issue credit quality

Credit metrics on newly issued conduit deals in the second half of 2016 are, on average, showing signs of
stability and, even in some cases, improvement, across both underwritten and rating agency statistics.
Averages, however, do not tell the fully story, and we think it is equally important to look at the distribution of loans
within and across deals as well.
While there has been a noticeable overall improvement in credit quality and some signs of an overall decline in barbelling
within deals, better credit quality deals have skewed the overall cohort averages.
As a result, there is still a notable difference in underwriting quality from deal to deal. Not surprisingly, this has led to
increased spread tiering in deal pricing. New issue pricing, on deals this quarter, have seen a range on triple-As from
S+100 bp to S+120. Triple-B minus bond spreads have ranged between S+480 bp on the tight side to as high as
S+700.

We believe the preparation for risk-retention has contributed to some of these changes and that conduit
credit quality is likely to continue to evolve, into the early part of next year, as the format for risk retention-
compliant deals take shape.
Regardless of the overall direction of average credit quality, we believe as various parties try the new structures, tiering
across deals will likely stay pronounced.
Some of the notable changes in conduit deals we discussed in more detail in a recent weekly include:
Average deal size has tended lower while the range between deals has shrunk. We think deal sizes will likely
remain close to this years average, at around $860 million per transaction.
Underwritten LTV metrics have shown a marked improvement over the past few quarters, a departure from the
period prior to 2015, when leverage creeped higher. The differences in LTVs, at the deal level, from high to
low, however, still remain large.
The rating agency statistics also suggest a slight decline in leverage over time. But even here, there are
differences in opinion and contrasting views depending on the slice of the market one is focusing on.
Because averages can be misleading, especially if there is a large dispersion within each pool, we look at the
distribution of LTV and DSCR, using our heat maps. Figures 66 through 68 show the progress from 2015
through the second half of 2016. The darker spots indicate areas of increased concentration. It shows that
over the second half of this year, there has been a notable increase in the concentration of loans with higher
DSCRs and lower LTVs and a decline in the percentage of loans with higher leverage levels and low DSCRs.
Starting in the second quarter of this year, the concentration of IOs started to drift lower. At the same time,
though, the percentage of term IO loans has been steadily rising.
The concentration of primary (both city and metro) exposure has notably increased in the second half. Tertiary
exposure has declined.
While subordination levels have, on average, been mostly decreasing, dispersion has notably increased, from
deal to deal, across the capital stack. While in the past this was due to rating agency selection, the larger
differential in subordination levels, from deal to deal, is now more related to the differences in underwriting
quality between each of the transactions.
Figure 66: Distribution of LTVs and Figure 67: Distribution of LTVs and Figure 68: Distribution of LTVs and
DSCRs for 2H 2016-to-date DSCRs for 1H 2016 DSCRs for 2015
>80% >80% >80%
Risk 75%-80%
Risk 75%-80% Risk 75%-80%
70%-75% 70%-75% 70%-75%
65%-70% 65%-70% 65%-70%
60%-65% 60%-65% 60%-65%
55%-60% 55%-60% 55%-60%
50%-55% 50%-55% 50%-55%
45%-50% 45%-50% 45%-50%
40%-45% 40%-45% 40%-45%
<40% <40% <40%
>2.00
0.00-1.00
1.00-1.10
1.10-1.20
1.20-1.30
1.30-1.40
1.40-1.50
1.50-1.60
1.60-1.70
1.70-1.80
1.80-1.90
1.90-2.00
>2.00
>2.00
0.00-1.00
1.00-1.10
1.10-1.20
1.20-1.30
1.30-1.40
1.40-1.50
1.50-1.60
1.60-1.70
1.70-1.80
1.80-1.90
1.90-2.00
0.00-1.00
1.00-1.10
1.10-1.20
1.20-1.30
1.30-1.40
1.40-1.50
1.50-1.60
1.60-1.70
1.70-1.80
1.80-1.90
1.90-2.00
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp

Relative Value We look for spread tightening in early 2017

Lack of supply to start the year could lead to a technical bid
A combination of positive supply and demand technicals, supportive credit fundamentals, coupled with what
we see as pockets of good relative value leaves us fairly positive on CMBS spread direction, as we head
into the in the tail end of 2016 and into the start of 2017. We believe that there are parts of the capital stack and
certain sub-sectors that have not fully recovered from the early 2016-widening and could tighten from current levels.
As we noted above, we believe that new supply is likely to be very light to start the year. The upcoming implementation
of risk retention has curtailed new CMBS lending and pushed dealers to clear the decks, likely leaving balance sheets
light, as we enter the new year.
We also see demand being relatively strong with CMBS an attractive place to invest. The dearth of new issue
will come at the same time as legacy loan maturities accelerate and investors will need to reinvest the cash paydowns.
Many are likely to try to keep a similar allocation to CMBS.
One sign that there is increased cash being allocated toward the sector is that we have seen less secondary selling
during the last few rounds of new issue transactions. Earlier in the year, when there was a big new primary calendar, bid
list volume would increase, as investors were likely making room for the new deals. We have not seen the same selling
as of late, despite the rise in issuance.
In addition, we have seen some growing interest in the sector from non-US based investors. The introduction
of risk retention deals that are also EU-compliant could lead to a further expansion of the investor base, as the new
issue process resumes. We would expect that this interest would be more concentrated at the top of the capital stack.
In post legacy, BBB-s have the best value; top of the stack close to fair
Macro volatility, at the start of 2016 drove CMBS spreads wider as the sector underperformed competing financial
markets. As the markets recovered, CMBS spreads started to retrace but the bottom of the investment grade curve has
lagged the recovery.
We believe that triple-A CMBS appear fair to marginally Figure 69: CMBS LCF AAA and IG corporate
cheap, at this juncture. We see the potential for some spreads
tightening, relative to corporates, over the near-term, Diff (right-axis)
bp
with spreads having widened recently. In Figure 69 we 180 LUCI Index Single A 7-10Yr 100
compare last cash flow super-senior spreads to investment CMBS LCF
grade corporates, using the Credit Suisse LUCI single-A 160 80
index as a proxy.
140 60
CMBS is currently trading about 7 bp tighter than our
corporate benchmark, slightly narrower than its average 120 40
differential over the past year.
100 20
We would argue that at the current differential CMBS
triple-As are attractive to corporate bonds and the 80 0
differential should be wider. However, we do not see the
relationship changing dramatically over the near term. 60 -20
Jan-16
Jun-16
Jul-16
Mar-16
Feb-16
Nov-15
Dec-15
Aug-16
Sep-16
Apr-16
Oct-16
Nov-16
Dec-16
May-16
We expect to see continued strong demand for triple-As, at

current levels and this plus the lack of supply could help
push spreads tighter on the margin, but we do not look for a Source: Credit Suisse
large move.

Within the triple-As sector we believe there is better value in the wider trading names. Deals pricing over the
past month have seen a range on triple-As from S+100 bp to S+120 bp. This range seems too wide, to us, given
the liquidity and credit differential.
We have a similar outlook for AMs and double-As and believe they will largely move in sync with triple-As.
AMs have largely stayed between 25 bp and 35 bp wide of triple-As and are right in the middle of the range, giving
them just not that much room to tighten, unless triple-A spreads narrow. Similarly, we believe double-As also look fair.
We believe there is better relative value opportunity in triple-Bs and, to a lesser extent, single-As. Deal
selection, at this part of the capital stack is important however.
While the rest of the investment grade curve is now tighter, Figure 70: CMBS BBB- and HY spreads
since the start of the year, our triple-B benchmark is, bp Diff (right-axis) CMBS BBB- HY
generally, just back to those initial levels, depending on the 800 400
deal name. Triple-Bs also look relatively cheap to high yield
700 300
corporates, in our view.
600 200
We show the historical relationship between our high yield
corporate index and triple-Bs in Figure 70. After triple-Bs 500 100
traded tighter than our high-yield benchmark for most of
400 0
2014 and 2015, the relationship reversed, at the beginning of
2016, and has stayed that way since. 300 -100
We never like to just look at historical spread relationships for 200 -200
rich/cheap but also try to assess what has changed in the
100 -300
market to see if the spread moves make sense. Jan-16
Mar-16
Jun-16
Jul-16
Nov-15
Dec-15
Feb-16
Sep-16
Nov-16
Dec-16
Aug-16
Apr-16
May-16
Oct-16
We believe there are some important reasons why
triple-Bs have lagged this year and have factored them
into our analysis. First off, there are concerns about a Source: Credit Suisse
potential slowdown in real estate fundamentals. While we
believe this is a risk, any economic slowdown would also likely effect corporate bonds, keeping the relative value inline.
We believe a bigger reason triple-B minus bonds have lagged has to do with the sponsorship of the sector.
As faster money buyers retrenched to start the year, triple-B minus bonds felt the brunt of it, not only reducing buying in
the sector but adding further selling pressure. As the year progressed we believe the selling pressure has abated.
More recently we are seeing a resurgence of demand for triple-Bs. The buyer base has expanded and interest from
longer-term oriented investors has increased as buyers look to increase yield. Additionally, overall credit quality, of new
issues, has started to improve, adding to the demand from these investors.
We should see ongoing demand for single-A bonds as well and we believe they have some potential to tighten as well,
but less so than the triple-Bs.
Lastly, we note if the horizontal risk retention piece is used next year, it will also potentially reduce the supply of triple-B
minus bonds, adding scarcity value to the sector on top of what we see as increasing demand. Of course the vertical
slice also reduces the number of bonds outstanding but to a much smaller degree.
The caveat on this recommendation is deal tiering will become increasingly important. We see this not only at
the triple-B level but across the entire capital stack. Of course, tiering becomes more important at the lower
subordinated tranches.
Tiering is already present and we have seen a larger spread retracement on the deals with better perceived credit quality
while the weaker deals have notably lagged. This can clearly be seen in recent new issue pricing and secondary trading.
We believe the market will continue to discriminate between deals based on credit perception, observed liquidity and risk
retention format.

The legacy conduit market provides a good example of how deal Figure 71: Deal-level life-to-date cumulative
performance can vary, across transactions, and the importance of realized losses
tiering by credit. We show the range of losses, life-to-date, for Avg Vintage Realized Loss %
legacy conduits, by cohort, in Figure 71. Even the better 18%
performing cohorts show a wide dispersion in deal level losses, 16%
from top to bottom and from the vintage average. 14%
The same factors that we see driving more demand and liquidity 12%
to triple-B bonds may also carry over, to a lesser extent, to the
10%
below investment grade portion. We may see increased volume
of seasoned double-Bs trade during the next year. We do note, 8%
however, that while trading may increase in this sector, it will 6%
likely remain less active than the investment grade portion.
4%
2%
0%
2002 2003 2004 2005 2006 2007 2008
Legacy CMBS may feel the pinch of a rate rise more than newer deals
We believe the recent spike in interest rates is worse for legacy credit than it is for deals issued since the
financial crisis. As we discussed above, the damage from a rate rise can be mitigated by a higher level of economic
activity and rising cash flows. However, loans with near term maturities have less time to benefit from that growth or
inflation potential, that is immediately priced into rates, but takes some time to be reflected in real estate fundamentals.
That said, we are still reasonably positive on the outlook for the successful payoff rate for legacy conduit
loans but, the rate rise is clearly detrimental to those mortgages that were on the bubble. There will be some
bonds, with extension upside that will benefit from this.
Single borrower deals continue to offer value

We also continue to find good value in single borrower deals but the tradable float makes it more difficult to
source bonds in secondary. Often bonds purchased at issuance do not subsequently trade.
Within the sector, retail deals have cheapened on a relative basis, as concerns over the property type have
grown. For example, we see some single-A retail bonds trade at similar spreads as double-Bs from office deals. We
believe that differential is way too wide leaving many of these retail deals offering very good value, in our view. This also
fits in with our assessment that prime retail assets will outperform weaker ones.
CMBX.8 BBB- has cheapened over the past few months

While there has been a notable flattening of the vintage curves, in the triple-A portion of CMBX, the same has not
occurred in BBB-, the other liquid area of the index. Given our view that BBB- cash is relatively attractive we
think the recent cheapening of CMBX.8 BBB- is notable.

In Figure 72 we look at the differential between BBB- cohorts,

over the course of the year. Since the beginning of August we Figure 72: CMBX BBB- spread differentials
have seen CMBX.8 BBB- widen compared to both BBB-.7 and bp CMBX BBB- 9 to 8
BBB-.9. CMBX BBB- 8 to 7
200
While the CMBX.8 deals have the highest exposure to some of CMBX BBB- 7 to 6
the oil-sensitive regions the total remains relatively small and the 150
issues have been known for some time. We also do not see the
cash/synthetic relationship basis being materially different in 100
CMBX.8, than either the Series 7 or Series 9 basis.
50
We believe that given the recovery and recent stability in oil
prices, energy related credit issues, in CMBS, are largely priced 0
in. CMBX.8 BBB- may rebound, versus the surrounding indices,
-50
as we enter the new year.
Agency spreads close to fairly valued at -100

Jan-16 Apr-16 Jul-16 Oct-16
the top of the stack
Source: Credit Suisse, Markit
Despite our projection for increased Agency CMBS
issuance, we are not overly concerned with supply impacting spreads. We see most of the sector as close
to fairly valued, as we enter the later part of the year. As a result, we believe spreads will largely take its
cues from other sister products.
As we noted above, we are expecting an increase in issuance, rising 7% to $140 billion, but we believe that the supply
will be absorbed for several reasons. First off, the composition of the issuance has changed, over the past couple of
years, and while the total has gone up, not all of the issuance is what we would call plain vanilla fixed rate deals. To
this point, the Freddie K deals issued this year (which will comprise more than one-third of 2016s Agency CMBS
issuance) came from a number of different programs (Figure 73). Additionally, a surprisingly large percentage (53%)
this year has been floating rate (Figure 74) and we would not be surprised to see that proportion rise in 2017.
Figure 73: Freddie K issuance has become more Figure 74: Over half of this years Freddie K
diversified in program types issuance is expected to be floating-rate
$bn $bn
10yr fixed 5 / 7 / 15-yr fixed Floater Other Floating-rate Fixed-rate
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
* 2016 is expected * 2016 is expected

Source: Credit Suisse, Freddie Mac, Commercial Mortgage Alert Source: Credit Suisse, Freddie Mac, Commercial Mortgage Alert

We also believe that the transparency of Freddies supply calendar has helped to assuage concerns over the increase in
supply, taking away the uncertainty about the timing of future deals and allowing buyers to set up capital in advance.
We also believe that demand for the product will remain strong. The sector benefits from relatively favorable
regulatory capital treatment and the buyer base has continued to expand. The increased demand helped keep spreads in
check, this year, despite the record supply and we dont see that changing. We also believe that liquidity remains strong
and the greater cashflow certainty remains appealing to investors.
On the latter point, lack of negative convexity may be an added Figure 75: FNA / FREMF spread differential to
attraction for the buyer base, relative to residential mortgages, if LCF AAA
the 10-year Treasury rate continues to tick higher. bp FNA A2 to LCF AAA
Fannie and Freddie spreads, in the 10-year part of the curve are 80 FREMF A2 to LCF AAA
on the tight end of their recent range. Over the past year,
spreads have ranged from a tight of about S+68 bp, where they 70
are now, to as wide as S+105 bp, at the height of the first 60
quarter volatility.
50
Agency spreads have been highly correlated with the last
cashflow conduit triple-As. The current spread differential is 40
right around 45 bps which, as Figure 75 shows, is fairly close to 30
the average spread, over the past few years. The chart highlights
that the differential has had some volatility but right now we think 20
Jun-13
Jun-12
Jun-14
Jun-15
Jun-16
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
it looks relatively fair.
At current levels it is our view that private label triple-B
minus bonds offer better relative value than the
Source: Credit Suisse
subordinate Freddie K bonds. The comparison is relevant as it
appears to us that subordinate credits, Class B and C, have also
started to trade more inline with private label CMBS, over time. Additionally, with the introduction of the AM class, the
thickness of the Class B tranches has decreased by about half. On the positive side however, it also reduced the class
size of these bonds so the change helps a little from a technical aspect. Concerns about multifamily performance and
increased supply, may also weigh on this part of the capital stack.
On the GNMA side we are also seeing continued strong demand from bank buyers as the sector helps many institutions
meet their liquidity coverage ratios. In addition, prepayment speeds in this sector have been coming in faster than
investors had anticipated and, as a result, the adjustments market participants are making in their assumptions should
benefit the product.
Liquidity fell less dramatically than we expected

Last year we highlighted our concerns about the waning liquidity in the CMBS and fixed income markets in
general. While liquidity remains a concern for us, the changes over the past year were less dramatic and the
market was less affected than we thought likely. Even during periods of heightened volatility, like we saw to start
the year, we thought secondary and CMBX liquidity held up relatively well. Nevertheless, we believe market level liquidity
bears watching as it has implications for performance and relative value.
A primary driver of changes in liquidity in our view has been increased regulations for the financial services industry
following the global financial crisis. These new rules reduce the ability of dealers to intermediate transactions and hence
supply liquidity. The changes put in place make it more difficult and more expensive to take and hold risk. Specifically,
dealers are now facing higher capital requirements and curbs on proprietary trading. This has not gone away.
We looked at several dimensions to liquidity last year and various benchmarks to try to gauge them. One of them was
secondary trading volume as indicated by the TRACE data. We show the 60-day moving average (approximately three
months) in Figure 76 and the turnover or the average daily volume as a percentage of the total outstanding in Figure 77.

Figure 76: TRACE CMBS trading volume (60-trading Figure 77: TRACE CMBS quarterly trading volume as
day moving average) a percent of outstanding balance
$bn 12%
1.7
1.6 11%
2014 2015 2016
1.5 10%
1.4
9%
1.3 2015 '16
1.2 8%
1.1 7%
1.0
6%
0.9 2012 2013 2014
2012 2013
0.8 5%
0.7 4%
Jun-12
Mar-13
Jun-13
Jun-14
Jun-15
Mar-16
Jun-16
Mar-12
Mar-14
Mar-15
Sep-12
Sep-11
Dec-11
Dec-12
Sep-13
Dec-13
Sep-14
Dec-14
Sep-15
Dec-15
Sep-16
Dec-16
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
Q2 16
Q3 16
Source: Credit Suisse, FINRA Source: Credit Suisse, FINRA, Trepp
While the trend over the past few years has been lower, the pace of decline has slowed and, in fact, has increased
recently, above the trend line from 2013. Total volume traded is down about 6%, for the first 11 months of the year as
average daily volume fell from just over $1 billion last year to about $950 million this year. However, in the past six
months, we have seen an increase in TRACE volume, versus the same period last year, up about 3%. In addition, our
second measure shows that turnover, which normalizes the trading volume for the size of the market, has actually turned
the corner and ticked higher in three of the past four quarters, including the first quarter.
On the flip side holdings of CMBS, by primary dealers have mostly continued to decline. The New York Fed
reports this statistic weekly, broken out into private label and agency sectors. We show the progression over time since
they started reporting the information in 2013, in Figures 78 and 79.
Figure 78: Primary dealer positions in private label Figure 79: Primary dealer positions in Agency CMBS
$bn $bn
13 10
12
9
11
8
10
7
9
6
8
5
7
6 4
5 3
Jul-14
Jul-16
Jul-13
Jul-15
Oct-13
Jan-14
Oct-14
Jan-15
Oct-15
Jan-16
Oct-16
Apr-13
Apr-14
Apr-15
Apr-16
Jul-13
Jul-14
Jul-15
Jul-16
Jan-14
Jan-15
Jan-16
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Source: Credit Suisse, NY Fed Source: Credit Suisse, NY Fed

On the private label side the balance sheets rebounded from a series low in June 2016 to mid-September, but have
subsequently fallen. Agency CMBS balance sheets have exhibited more volatility but show a similar pattern.
We also keep an eye on CMBX liquidity. This market, which is actively and widely quoted, gives a sense for bid-offer.
We show the bid-offer, over the past two years, by rating, using CMBX.7 as a proxy, in Figure 80.
Figure 80: Average CMBX bid/offer spread over the past two years
bp
50
45 CMBX.7.AAA
40 CMBX.7.AS
35 CMBX.7.AA
30 CMBX.7.A
25 CMBX.7.BBB-
20 CMBX.7.BB
15
10
5
0
Jan-15
Jun-15
Jul-15
Jan-16
Jul-16
Mar-15
Mar-16
Jun-16
Nov-14
Dec-14
Feb-15
Nov-15
Dec-15
Feb-16
Nov-16
Aug-15
Sep-15
Aug-16
Sep-16
Apr-15
May-15
Oct-15
Apr-16
May-16
Oct-16
Source: Credit Suisse
There was a fairly unsurprising spike in the bid/offer in the early part of the year, peaking in February. Since
then the bid/offer has trended lower, for most tranches. The bid offer spread in AAAs and BBB-s, the more liquid
tranches, have largely retraced and stand only a touch wider than where they were a year ago. The middle of the stack
and BBs have only seen a partial retracement of the quoted spread.
Synthetic volume spiked in the first quarter (Figure 81), during the heightened volatility, indicating that CMBX was clearly
liquid even at wider bid-offer spreads. Since then however volumes have declined, in each successive quarter.
Figure 81: CMBX quarterly trading volumes Figure 82: CMBX monthly trading volumes
$bn CMBX.6 CMBX.7 $bn
CMBX.8 CMBX.9 CMBX.6 CMBX.7 CMBX.8 CMBX.9
90
30
80
70 25
60
20
50
40 15
30
10
20
10 5
0
0
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1
2016 Q2
2016 Q3
Jan-16
Mar-16
Jun-16
Jul-16
Feb-16
Nov-16
Aug-16
Sep-16
Apr-16
May-16
Oct-16
Source: Credit Suisse, DTCC Source: Credit Suisse, DTCC
While some have pointed to the new uncleared margin rules (UMR) as negatively effecting CMBX liquidity
we believe the concerns are overstated. First, as shown above, CMBX bid offer spreads have actually come down
since the rules went into effect. Secondly, even after the rule went into effect, November trading volumes notably picked
up to the largest monthly level, since the first quarter of this year (Figure 82).

DISCLOSURE APPENDIX
Certification
The author(s) of this material each certify, with respect to the securities or issuers that such author analyzed, that (1) the views expressed in
this material accurately reflect his or her personal views about all of the subject securities or issuers, and (2) no part of his or her
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the author in this
material.
Other Important Disclosures

These materials have been prepared by a Sector Strategist. Sector Strategists are employees of CS's Fixed Income Sales and Trading
Department and are supervised by Fixed Income Sales and Trading managers. Their primary responsibility is to support the trading desk. To
that end, Fixed Income Sector Strategists prepare trade commentary, trade ideas, and other materials ("materials") in support of CS's
trading desks. The Fixed Income Trading Desk trades or may trade as principal in the securities (or related financial instruments) that are the
subject of these materials. As part of the Sales and Trading Department, the author of this material may have consulted with the Firms
traders and other personnel while preparing this material. Fixed Income Trading Desks may have accumulated, be in the process of
accumulating, or accumulate long or short positions in the subject security or related securities on the basis of this material or other Sector
Strategists' materials. Trading desks may have, or take, positions inconsistent with materials provided by Sector Strategists.
Sector Strategists are not part of CS's Research Departments, and the views of CS's Trading Desks, including Sector Strategists, may
differ materially from the views of the Research Departments and other divisions at CS. CS has a number of policies in place reasonably
designed to promote the independence of CS's Research Departments from CS's Fixed Income Trading Desks, including policies relating to
trading securities prior to distribution of research reports. These policies do not apply to the materials provided by Sector Strategists.
The information in these materials has been obtained or derived from publicly available sources believed to be reliable, but CS makes no
representations as to its accuracy or completeness. Sector Strategists may receive or develop additional or different information subsequent
to your receipt of these materials. The materials provided by Sector Strategists are subject to change, and subsequent views may be
inconsistent with information previously provided to you. CS does not undertake a duty to update these materials or to notify you when or
whether the Sector Strategists' views have changed. These materials and other written and oral communications from Sector Strategists are
provided for informational purposes only. They should not be considered sufficient upon which to base an investment decision.
Solely for purposes of the CFTCs rules regarding derivatives research and to the extent this material discusses derivatives, this material is a
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Securitized Products Desk Strategy

THIS MATERIAL IS NOT RESEARCH AND IS INTENDED

2017 CMBS Year Ahead Outlook

Making CMBS great again? Sector Strategists

Making CMBS great again?

2017 CMBS Year Ahead Outlook | December 9, 2016 2

Sector relative value

2017 CMBS Year Ahead Outlook | December 9, 2016 3

A few thoughts on the future of retail and CMBS

2017 CMBS Year Ahead Outlook | December 9, 2016 4

Figure 3: Retail remains a significant portion of CMBS conduit origination

2017 CMBS Year Ahead Outlook | December 9, 2016 5

What is driving the changing retail landscape?

2017 CMBS Year Ahead Outlook | December 9, 2016 6

Figure 5: Department store sales Figure 6: Total retail sales

2017 CMBS Year Ahead Outlook | December 9, 2016 8

Figure 9: BBB- / BB CMBX.6 prices Figure 10: BBB- / BB CMBX.6 spreads

Source: Credit Suisse, Markit Source: Credit Suisse, Markit

2017 CMBS Year Ahead Outlook | December 9, 2016 10

Positive trends for CRE, but greater uncertainty post election

Economic environment trumps most other factors

2017 CMBS Year Ahead Outlook | December 9, 2016 11

Figure 11: A strong relationship between employment and CRE prices

Y-o-Y change in property prices

Source: Credit Suisse, NCREIF, Bureau of Labor Statistics

Vacancy and supply are now closer to being in balance

2017 CMBS Year Ahead Outlook | December 9, 2016 13

2017 CMBS Year Ahead Outlook | December 9, 2016 14

Figure 16: Completions-to-absorption ratio by property type

For multifamily properties, completions are set to outpace absorption, for

2.5% 75% $90

2017 CMBS Year Ahead Outlook | December 9, 2016 15

Source: Credit Suisse, Reis, CoStar Source: Credit Suisse, NCREIF

2017 CMBS Year Ahead Outlook | December 9, 2016 16

Small gains in CRE prices as the trajectory moderates

2017 CMBS Year Ahead Outlook | December 9, 2016 17

100 2008 -29.8% -9.5% -12.4% -18.9% -17.1% -20.4%

90 2009 -2.6% -20.8% -16.4% -25.7% -25.9% -25.5%

80 2010 21.0% 7.9% -5.0% 9.2% 15.7% 3.6%

70 2011 11.7% 10.0% 0.9% 8.1% 10.7% 5.9%

2016 ytd 3.2% 3.3% 6.8% 6.3% 5.1% 7.3%

2017 CMBS Year Ahead Outlook | December 9, 2016 18

2017 CMBS Year Ahead Outlook | December 9, 2016 19

Private capital allocation still rising but also at a slower pace

Source: Preqin, Credit Suisse Source: Preqin, Credit Suisse

* Percent of total acquisitions for 2016 YTD is as of Q3 * Year-to-date

Non-major markets catch up a little but still seem attractive

2017 CMBS Year Ahead Outlook | December 9, 2016 21

Figure 35: CRE price indices in major and non-major

2017 CMBS Year Ahead Outlook | December 9, 2016 22

2017 CMBS Year Ahead Outlook | December 9, 2016 23

Figure 39: Historical CRE performance during 10-year rate increases

Even as CMBS issuance fades other financing remains intact

2017 CMBS Year Ahead Outlook | December 9, 2016 24

2017 CMBS Year Ahead Outlook | December 9, 2016 25

Risk retention fears fading; 2017 issuance at $65-70 billion

2017 CMBS Year Ahead Outlook | December 9, 2016 26

2017 CMBS Year Ahead Outlook | December 9, 2016 27

We view the market share of CMBS as a key variable

retention, if the implementation does not go as smoothly as we

2017 CMBS Year Ahead Outlook | December 9, 2016 28

Transaction volume begets origination

Conduit supply should be about $40 billion to $45 billion