NEW YORK CITY-Today’s CMBS market, says Joseph Franzetti, senior vice president at Berkadia Commercial Mortgage LLC, is somewhat like the dating game. “We had a lot of fast money buying these securities, and when they saw a better opportunity, they took it,” Franzetti said. “And like a person who found a better date, they left you standing by yourself.”
That leaves lenders and investors high-and-dry with CMBS 3.0, the latest cycle in the world of commercial mortgage-backed securities. Lenders, investors and legal counsel from Ballard Spahr LLP, Berkadia, PNC, Schulte, Roth & Zabel LLP, the Shooshan Company and UBS Securities LLC discussed at the Information Management Network’s Real Estate General Counsel’s Forum that despite signs of improvement, the CMBS pipeline is narrowing and spreads are continuing to widen.
“The pipeline was $10 to $12 billion and is down to $2 billion to $4 billion,” said Christopher C. Reilly, managing director at UBS Securities LLC. He explained that much of the reduction is related to the volatility in the stock market after ratings agency Standard & Poor’s downgraded the US credit rating and yanked $1.5-billion in commercial mortgage-backed securities off the market due to new regulations criteria in the summer.
But Reilly said UBS is still focused on underwriting strong assets, such as Trinity Center at 111 Broadway in Lower Manhattan and 1700 Market St. in Center City Philadelphia. “We will look at deals that are higher leverage and lower coverage, but are securitized at much lower levels so we can take down the mezz and sell it,” he said.
Kicking off CMBS 3.0 is the re-introduction of Goldman Sachs & Cos.’ and Citigroup Inc.’s commercial mortgage-backed securities back onto the market post S&P. Deutsche Bank and UBS AG are also testing the waters by selling a $1.4-billion pool of public and private CMBS, including 43 commercial mortgages secured by 64 properties, including drivers such as the Fairfield Inn & Suites by Marriott and The Four Points by Sheraton in Midtown Manhattan; Three Allen Center in Houston; the Quadrus Office Park in Menlo Park, CA; the Providence Place Mall in Providence, RI; and the Columbus Sussex Portfolio of eight full-service hotels across eight states.
But Franzetti said the CRE industry is still recovering from when CMBS hit rock bottom in 2007. “Folks that never truly left the market but sized down dramatically were starting to do some transactions in 2010,” he said. “This activity made people think that the markets had returned and it was somewhat delusional. We were absolutely thirsting, but we didn’t realize that we were drinking motor oil.”
Andrew D. Coler, senior vice president at PNC, said “spreads have come up and flattened out.” According to new data from Trepp, delinquency rate for US commercial real estate loans in CMBS inched up four basis points to 9.56% after reaching an all-time high in July.
Colin Uckert, general counsel at The Shooshan Company, said the “tightening of the credit market” is narrowing the pipeline, while Jeffrey A. Lenobel, partner and chair of real estate department at Schulte Roth & Zabel LLP, said the dynamic of traditional loan structures is continuing to change. “We are starting to see that some of our clients are not taking a fixed rate loan or five-year fixed-rate, they are taking a floating rate,” Lenobel said.
He added that class A properties are trading at high LTVs without unusual guarantees, but the secondary and tertiary markets are the ones that are hurting. “We’ve seen B projects in something other than primary locations that are having huge difficulty,” he said. “CMBS was once the facilitator in Pittsburgh, Cleveland, Detroit and properties in the Midwest, and they’ve been hit hard.”
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