The CMBS market plays a vital role in commercial real estate by providing liquidity to the market. CMBS provides long-term debt financing, which plays a critical role in paying off construction loans upon stabilization, providing acquisition financing for investors seeking stable yields and freeing up investors’ balance sheets with non-recourse loans. However, a combination of recent macroeconomic volatility and punitive legislation from Dodd-Frank scheduled to go into effect later this year has led to a volatile CMBS market in recent months.
Prior to the current CMBS turmoil, a typical CMBS quote was 200 to 250 bps over swaps. Those spreads have widened 100 bps, pushing typical spreads into the 300 to 350 range. Further frustrating borrowers, brokers and CMBS loan originators alike, recent market volatility has forced CMBS lenders to increase spreads prior to closing over those quoted in the loan application by as much as 50 bps.
In addition to market volatility increasing spreads on CMBS loans, risk retention provisions included in Dodd-Frank has greatly increased the cost of capital for B-Piece Buyers, thereby thinning out that market. As a result, the remaining B-Piece Buyers hold greater clout and have been increasingly kicking loans out of securitization pools until the originating bank can go back to the borrower and renegotiate loan structure by reducing leverage, eliminating interest-only periods and increasing reserves and cash flow sweep provisions.
While many borrowers and their mortgage brokers have been understandably reluctant to wade into the choppy waters of the CMBS market, the uncertainty of entering into a CMBS loan application is likely to return to more normal levels in the near future. Lenders, understanding the negative perceptions being created, are taking steps to mitigate borrowers’ exposure to market volatility. Many lenders are tying loan spreads to benchmark bond prices, in hopes that the risk of spread widening can be offset by the possibility of spread tightening. Additionally, on larger loans, some banks are agreeing to fix spread for 10-20 bps of rate premium, thereby eliminating uncertainty to the borrowers.
During these periods of uncertainty, borrowers can greatly benefit from the guidance of an experienced Commercial Real Estate Intermediary such as Metropolitan Capital Advisors (MCA). MCA’s experienced team maintains a constant pulse on the market conditions and can guide clients to loans and lenders with the greatest certainty of execution with the lowest likelihood of loan terms changing during closing.