by Scott Lynn, Director/Principal
Even during the high flying years of 2005 to 2007, the CMBS market was always subject to the late summer blues as traders and market makers wrapped up summer breaks or got the kids off to school. This summer has been exasperated by the debt ceiling crisis, double dip recession fears, European debt, US downgrade and now, a turbulent stock market.
What else can possibly go wrong? Rating agency uncertainty delayed a major securitization ,and CMBS spreads have blown out from SWAPS plus 180 in June to as much as SWAPS plus 350 to 400 in current term sheet talk.
Our firm noticed a significant wave of conservatism flowing through the attitudes of CMBS originators beginning in June by either increasing spreads or lowering loan proceeds via higher debt coverage requirements and/or lower loan to values with very conservative appraisals. Some CMBS shops have either stopped quoting while others have either delayed their entrance to or left the CMBS game field altogether.
The current hope is senior traders and decision makers will “get back to business” after Labor Day allowing the CMBS market to re stabilize in the early fall. Let’s hope so! There are six major securitizations scheduled between Labor Day and Thanksgiving.
Despite the waves of aftershocks reverberating throughout the CMBS world last week, our firm managed to fund a ten year fixed rate loan for a shopping center in Farmington, New Mexico…that’s right, Farmington, New Mexico!!! CMBS loans are still available for quality well located leased property with an interest rate in the range of 5.75% to 6.5%.
The CRE market needs “all hands on deck” from every capital provider available if it is going to absorb the $1.7 trillion off debt that will be maturing between now and 2015. A portion of this maturing debt is beginning to get resolved by lenders at a faster pace. Real Capital Analytics estimates distressed debt has been reduced by $5.5 billion per month over the past year either by debt sales, restructure with the Borrower or payoff (most likely at a discount).
A substantial amount of equity capital has also been buying distressed debt via large loan pool sales, auctions and “one off” loans or distressed asset sales. These sellers have had to carefully weigh “cashing out” in a distressed sale versus holding the asset to maximize recovery. With a mountain of maturing debt forthcoming, there will continue to be upward pressure on Cap Rates except for the Core/Trophy assets.
The one glimmer of hope for asset prices is that generally speaking, CRE markets are not over built. Properties in most asset classes are relatively well occupied with good cash flow. The deals that are really trading at so called “distressed pricing” are distressed for a reason…they aren’t leased and have no cash flow. Leasing risk or a lack of cash flow is directly correlated to the distressed price.
Provided interest rates stay low and lenders continue to enter and/or stay in the market, leveraged CRE trades/sales will offer attractive returns and keep the markets upright. Significant asset appreciation may not materialize but at least the markets won’t slide backwards. Of course, all of this is predicated on everyone getting back to work after Labor Day. Summer is over. Spread the word.
Want to learn more, contact Scott Lynn, Director/Principal