Place your CMBS Bets
It seems a large percentage of our Quick Poll respondents are fond of fairytales, with 70% of respondents stating their belief that "CMBS is sleeping," far outweighing pessimistic respondents who said "CMBS is dying" (12%) and "CMBS is dead" (18%).Aden W. Kun, a vice president with Newport Beach, CA-based real estate investment bank Buchanan Street Partners, thinks Prince Charming may eventually come around and wake the CMBS market.
I would take the side that it's sleeping, unless you think it's going to be a slow death. There's still some activity going on in the market. However, it's slowed appreciably. At the end of last year at this time we were running about $107 billion of US CMBS, and this year at end of May 2008 we're a tad under $11 billion US CMBS. It's been pretty dramatic.
There are a lot of reasons for that. Investors have gotten burned. There's been doubt whether the ratings have been accurate. In June, you bought a triple-A bond, but you'd have to ask yourself, 'Does it really have a triple-A risk character?' The implication is if the triple-A bond wasn't really a triple-A risk, that means you're not really being compensated.
Why CMBS might be sleeping and it might come back is because they're tying to address that issue—the New York Attorney General is working on trying to change the way these ratings get generated. By changing the way the rating agencies get compensated, hopefully it will bring some more confidence to the market. Then, when you go to market, and you're shopping for a triple-A bond, you get adequately compensated.
Lately, we're seeing lenders saying they have a appetite to do this kind of business. When things get back on track, underwriting is going to be focused on fundamentals, it's going to be focused on actual broker cash flow, it's going to be based on not including really aggressive rent growth, it's going to be based on 70% leverage versus last year you could have gotten an 80% loan. These loans are going to have amortization, they're not just going to have interest-only and they're going to be loans for well-located and stabilized assets.
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