Jan. 3, 2014 – NREI online.com
For the first time in a long time commercial real estate professionals are feeling unbridled enthusiasm about the CMBS lending market heading into 2014. With U.S. CMBS issuance surpassing $85 billion in 2013, many industry insiders expect that lending volumes will reach the $110 to $120 billion range in 2014, while underwriting standards will remain relatively stringent. At the same time, conduit lenders have developed a healthy appetite for risk in 2013, showing a willingness to lend on properties in smaller markets and looking at all five major commercial property types, in addition to some of the better performing niche products, including student housing and seniors housing.
U.S. CMBS issuance for 2013 reached $86.1 billion, according to Commercial Mortgage Alert, an industry publication. The figure represents a 77.9 percent increase from the $48.4 billion in issuance recorded in 2012. Meanwhile, spreads on triple A-rated five-year bonds averaged 68 basis points in mid-December, while spreads on triple A-rated 10-year bonds averaged 94 basis points. Spreads on triple B-rated 10-year bonds averaged 320 basis points.
Commercial mortgage intermediaries confirm the resurgence of the CMBS market. For example, for NorthMarq Capital, a Bloomington, Minn.-based capital solutions provider, the volume of CMBS transactions the firm closed in 2013 was up roughly 50 percent from a year ago, according to William Ross, president. “It was a substantially better year,” he notes.
The resurgence of the CMBS market is “due to a combination of factors, including low interest rates, high demand for CMBS bonds and continued quantitative easing,” notes Joe McBride, research analyst with Trepp LLC, a New York City-based information provider on CMBS and commercial real estate banking markets. “The other thing is that the economy is improving and with that, property performance has been slowly improving,” McBride adds.
Barring a destabilizing macroeconomic event (or another government shutdown), commercial real estate professionals expect that CMBS lending volume will continue to inch up in 2014, driven by competition from portfolio lenders and looser underwriting criteria compared to 2011 and 2012. Projections range from roughly $110 billion for McBride to potentially $120 billion, according to Dan Gorczycki, managing director with commercial real estate services firm Savills LLC.
“CMBS origination is going well, there doesn’t seem to be a lot of volatility,” notes Steven Kohn, head of capital markets with real estate services firm Cushman & Wakefield. “We don’t see it changing any time soon. Clearly the market responded favorably to the Fed pulling back on bond buying and the interest rates haven’t jumped.”
The robust lending volumes are helping ease people’s anxieties about the avalanche of CMBS loan maturities that will begin to come due in 2015. While this year will see a relatively modest volume of maturities at approximately $82 billion, the following year the figure will jump to $152 billion, followed by $171 billion in 2016 and $214 billion in 2017, according to 1st Service Solutions, a borrower advocacy firm for the CMBS market. “That’s a lot for the market to digest,” says McBride. “Hopefully, the economy will be strong enough by that point to handle it.”
Capital markets experts are careful to point out that while CMBS lenders are getting more adventurous in entering smaller markets and underwriting properties they previously shunned, such as hotels, they remain disciplined on lending standards. Most are limiting loan-to-value (LTV) ratios to 75 percent, according to Gerard Sansosti, executive managing director with HFF, a commercial real estate capital intermediary. And they are staying away from mega-deals, refusing to create CMBS pools larger than $1.5 billion. “We don’t have the volume of bond buyers we had in 2006 and 2007,” Sansosti explains.
At the same time, they are now offering similar terms for loans on properties in primary and secondary cities, partly because it’s difficult to source attractive deals in core metros, notes Christopher T. Moyer, director of capital markets with Cushman & Wakefield. According to Moyer’s research, in mid-December, CMBS loans on commercial assets featured LTV ratios of anywhere from 55 percent to 75 percent, with spreads to LIBOR of approximately 200 basis points. Borrowers with multifamily properties tended to secure the best terms. For example, a 10-year fixed rate loan for one multifamily asset featured LTV of 75 percent and a spread of 185 basis points. In contrast, a CMBS loan placed on a suburban office building came with a spread of 275 basis points over a five-year term, though the LTV stayed at 75 percent.
Alex Cohen, CEO of Liberty SBF, a commercial real estate finance company with offices in Wynnewood, Pa. and Newport Beach, Calif., notes that a CMBS loan his firm closed at the end of December on a multifamily asset in California featured a 10-year term, a 30-year amortization and a swap spread of 245 basis points. “That’s pretty typical for multifamily,” says Cohen. He adds that the firm is seeing interest “in all collateral types, as long as they are quality assets.”
That’s about as good as borrowing terms will get in the next 12 months, according to Brian Stoffers, COO of capital markets with real estate services firm CBRE. While CMBS lenders have not yet had to deal with the risk retention rules written into the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will go into effect in 2015, most firms have begun pricing the risk into their loans, notes McBride.
In recent months, some CMBS lenders have been willing to go a bit higher on LTVs, to 80 percent, and have offered interest only loans on quality properties, notes Stoffers. But he and the others agree that’s about as far as they will go in the foreseeable future.
“I don’t think [Dodd-Frank] will dampen the market too much, but it will definitely hold them back from very high risk loans,” says McBride.
“If change occurs, it’s going to be over time and very moderate,” adds Cushman & Wakefield’s Kohn. “Underwriting criteria have eased a bit from a year or two years ago, but they are still not as aggressive as they were in the heyday of 2006. The spreads may tighten somewhat, but tough to tell for sure.”
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