WASHINGTON, DC—CMBS is back. Almost. Experts speaking at day two of the CRE Finance Council’s Annual Meeting this week said that the securitization industry is becoming more of a factor in commercial real estate, from both a lending and an investment standpoint, but there have been some shifts in the trends.
On the lending side, said Wells Fargo Securities director Steve Kraljic, average loan sizes are starting to shrink. Last year, a typical CMBS loan was $28 million; that figure has dropped to about $19.5 million this year. “That probably makes some sense since balance sheet lenders have moved into the large loan size market and taken some of the business away,” Kraljic noted. Underwritten LTV, meanwhile, is up by just one percentage point over the year to 63%, though leverage is getting pushed a bit more in today’s deals, likely due to pricing and competition. “Investors may have to go a bit lower in the stack to get yield,” he added, but where exactly it will be found—i.e., mezz, construction, etc.—has not yet been determined.
Right now, AAAs make up as much as 80% of the capital stack. From a money manager’s perspective, said BlackRock director Samir Lakhani, CMBS is interesting these days because there’s both legacy product and new issuances. The bulk of product that’s trading today, about 80%, is legacy product. “The market is bifurcated,” he said. “There’s the high-quality, carry portion at the front-end of the curve, and then there’s the riskier product located further down the stack. “We’ve actually seen the relative value creep down, and competition decrease, as you go down the stack.”
There’s a major difference between the legacy deals and new issuances, concurred the panelists, which also included Don MacKinnon, SVP and head of high-yield portfolio management for Cole Real Estate Investments; Goldman Sachs VP Rene Theriault; and moderator Paul Vanderslice, managing director for Citigroup Global Markets.
“One big, distinguishing feature in the syndication process today is the level of information available to people,” said Kraljic. “All the disclosure elements have been important and the pre-sale reports have been very robust, too. The new entrants have done a good job of distinguishing themselves.”
Indeed, the thing that’s still lacking in CMBS 1.0 deals is the lack of transparency, added Theriault. “There’s not enough information provided to make a strategic business decision,” he said. While there have been some efforts to improve this, there’s skepticism as to how much effort is being made. “I think there’s some avoidance, in addition to some exposure issues. There are people stuffed to the gills with 1.0 and not willing to take on more.”
That’s why Theriault prefers the 2.0 deals. “We have a very good template for a viable, long-term asset class, and there’s still some tweaking being done.”
The securitized market was brought up again on the third and final day of the CREFC conference, particularly in the “Navigating the Distressed Debt Marketplace” session. Moderated by PNC Real Estate/Midland Services SVP Kevin Donahue, the session brought together Blackstone Group managing director Peter Sotoloff, Matt Salem, managing director of Rialto Capital Management; Eastdil Secured managing director Michael Lesser; Bob Kline, CEO and principal, RW Kline; and Keith Gollenberg, managing director of Oaktree Capital.
When it comes to investing in distressed debt deals, Sotoloff says the best value is found the securities space. “We were able to buy a significant amount of legacy loans,” he said. “There haven’t been as many as we expected, but that’s testament to the Fed’s efforts to keep liquidity in the market and keep banks afloat.”
The market has indeed shown a tremendous amount of rescue capital opportunities, said Gollenberg. “What was once a trickle of deals is now starting to become a steady stream of resolutions come through, where actual assets—those bank-owned properties—are starting to be resolved.”
More loans are coming out of special servicers, said Lesser; expect a few billion dollars worth to come out of that segment this year. European loan portfolios are also being sold, but it’s been very slow going. Two biggest sources, added Salem, are direct relationships with regional banks and special servicers. “More banks are starting to let go of assets.”
Kline, too, sees more activity out there than there has been in the past. “No doubt we’re going to see fewer banks over the next few years.”
Which led Donahue to comment that perhaps “too big to fail is creating too small to survive.”
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