by Scott Lynn, Director/Principal
For those of us in the CRE Finance World, the arrival of CMBS 2.0 was a welcomed “end of the beginning event”. Suffice it to say, it is now clear we are at the end of the long hiatus of the CMBS market and moreover, we are at the beginning of a “new normal” with respect to a more disciplined securitized lending market…at least for the time being.
Production stats are already way up. First Qtr. 2011 loan closings have already eclipsed the $10+ billion that was closed for all of 2010. The major players are back in the game such as Citi Wells, Morgan Stanley, Goldman, JP Morgan, Deutche and CIBC along with a host of new participants that are quoting and closing deals.
Our firm recently took three separate assignments to market that resulted in loan term sheets for each request at the requested amount. A year ago, we would have been glad to get a debt offer on even one of these transactions.
The market is, however, exercising discipline and caution with respect to underwriting, so we are nowhere near the irrational exuberance of 2006 & 07. Loans just quoted in the last week to 10 days were all 75% LTV or less , well leased properties that will produce at least 1.25X DCR on real, in-place cash flow after reserves and amortization. No BS pro forma income assumptions, funny money earn-outs or interest only payments allowed!!!
At the beginning of 2011, experts were predicting there would be somewhere in the range of $40 to $50 billion of new CMBS originations. The forecast is probably going to be reset higher after the successful, late April closing of Cantor Fitzgerald’s $634,509,745 securitization along with a $ 1.5 billion Morgan Stanley/Bank of America offering. The CMBS market had been holding its breath throughout March and April waiting to see if these transactions would be absorbed. A week after closing, bonds in both transactions were selling at a premium.
Other recent positive CMBS market news includes….
There were two new entrants in the B piece market NorthStar Realty and Riverbanc/ Waterton Associates both of which have signed up to purchase unrated portions of upcoming CMBS offerings. The more B piece buyers seeking enhanced yields, the merrier for CMBS issuers.
According to Trepp, the percentage of CMBS loans in Special Servicing has not increased over the previous month and has in fact, slightly decreased. Is this a permanent sign? It may be too early to tell but it is much better news than the non-stop increasing default rate that has occurred over the past three years.
Finally, Moody’s reported an increase in the defeasance of commercial securitized mortgages equating to almost a 60% increase over 2010. Presumably, if a borrower is paying off an existing mortgage vis-à-vis a defeasance, it is doing so because it has a favorable financing alternative or they have sold the property at a favorable price….at least a price that exceeds the current debt. In an environment where sales or refi’s have been practically non-existent, this is a favorable sign.
It appears that the long awaited return of the CMBS market has gained some solid footing. The question now is not whether there is a lender for a deal but rather, who is the best lender for a deal? The answer is more complex than simply who is offering the best terms. The answer lies with who can offer the highest level of certainty and professionalism so that what you hear is what you ultimately get.
Indeed, careful underwriting, finding the right CMBS provider and maximizing financing proceeds will continue to be the challenge in an environment where it is likely that only one in twenty transactions will underwrite in today’s environment. While legacy CMBS defaults appear to have moderated, the prospect of future CMBS defaults remain a clear and present danger. Surely it is a welcomed relief that the revival of CMBS has gained a strong beachhead during the first four months of 2011. However, the reality is the revived CMBS market will only be able to absorb a small percentage of the CRE market’s refi needs. The recovery of the commercial real estate market and overall deleveraging of assets may very well take longer than any of us would otherwise prefer.
Want to learn more about this? Feel free to contact Scott Lynn, Director/Principal.