The CMBS new issuance is hard to predict at this point, but there seems to be a consensus that it will range from $40- $50 billion for 2012. Things are picking up, but there are still only a relatively small number of issuers, and pools remain modest in size at around $1.2 billion. While there are a number of potential issuers sitting on the sidelines, it is unclear when more will actually have allocations to step back in. There is also still a reluctance to lend on smaller, secondary and tertiary markets. It is likely that the originations will remain mostly larger market focused and larger transaction sized, with the average around $20-30 million. That portends an origination of a limited dollar volume for the rest of this year and likely 2013.
Dodd Frank rules and other regulatory restraints, capital requirement, and other regulatory constraints will keep originations limited by constraining allocations of capital to CMBS, and much tighter underwriting. When CMBS 1.0 began in 1993, there was very tight underwriting due to the scars from the S&L crisis. That lasted quite a few years. It is likely that tight underwriting will remain the case for many years into the future this time as well. There are also many fewer potential issuers of size. Lehman, Bear and others are gone, Credit Suisse shut down CMBS, and others simply went back to being banks and not issuers. It is unlikely that B of A or JP Morgan will ramp up originations to anywhere near the levels of 2007. That is not likely to change even though several others like Cantor have entered the market. There is simply a greatly reduced capacity to originate and that is not going to change.
Many black swans remain, the biggest being Iran. It is highly likely that there will be military action of some type by late summer or fall. The Iranians are watching the failure of the US to act in Syria, and they see Obama afraid to act forcefully against them, so they will not have any reason to fear the US attacking. That will just lead to a ramping up of concern by Israel and a greater likihood of an Israeli attack. That will blow the markets.
Putting aside geopolitical issues, the numbers are fairly simple. The run off of maturing CMBS loans is now exceeding originations by around two thirds. Depending on what occurs in the market over the next year, that differential will probably shrink, but maturities and payoffs, DPO’s or other reductions will remain high. As we get closer to the maturing of ten year notes in 2015 to 2017, the acceleration of maturities is likely to continue to exceed originations.
In the end, it is very probable that CMBS will not be the driver of the market that it had been in 2006-2007. It could happen that outstanding CMBS bonds will drop below $500 billion on a few years and that will lead some investors to stop buying due to the lesser liquidity. If bond buyers start to pull back in greater numbers, then it may be that a public market of some sort will emerge. The need for refinancing will continue to grow as more maturities come due and as the economy recovers. Demand for capital has to increase over the next five years. Servicers cannot keep extending and pretending. Investors need to monetize through sales. New development has to start sometime in the next couple of years for more than just multi. All of this will drive a demand for far more capital to real estate than is now the case. The question is what will be the source of that capital. CMBS will surely play a role, but the question nobody has a good answer to is what will be the volume. Capacity will probably be consumed by refinancing all of the massive amount of 2005-2007 paper so there may not be much capacity for new deals. That is a great opportunity for banks and credit companies to step up their lending and to do so on a well underwritten basis. With far higher capital requirements on banks under Basel III, and other Dodd Frank rules, it is very likely that credit companies and private funds will emerge as the biggest source of moderate sized and secondary market lending. The life companies will stay very busy with the top quality and larger deals for many years to come. Life companies should have a very good run if they stay competitive. As rates rise over the next five years, life companies should be able to compete well given their more stable and reasonable cost of capital, compared to CMBS issuers.
As maturities ramp up there will be a growing demand for loans and lenders should do well so long as they remain disciplined underwriters, and don’t let themselves get pushed into covenant lite and other lessening of standards like we saw in early 2011. That is how we got to Lehman and 2008.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
