Although volatility in the capital markets over the summer - especially following the downgrade of U.S. Treasuries on Aug. 5 - has spooked commercial mortgage-backed securities (CMBS) market participants, this financing source is definitely back, say experts, while not as strong as anticipated earlier in the year. I In 201 1, new CMBS issuance may not top $30 billion, far below estimates of $30 billion to $50 billion early in the year. Still, anywhere from $5 billion to $8 billion was in the CMBS pipeline as of the end of August.
..."CMBS has a smaller proportion of commercial real estate originations than at the height of the market in 2007, when it accounted for over 50 percent of the volume of new originations," says Ben Carlos Thypin, director of market analysis at RCA.
"In 2011, as of the end of August, CMBS made up about 21 percent of commercial real estate origination volume - slightly down from 26 percent for all of 2010, but higher than in 2009 when it accounted for only 10 percent of commercial real estate originations."
CMBS competes with a variety of lending sources, including foreign and domestic banks, thrifts, life insurance companies, and Fannie Mae and Freddie Mac, with the last two sources only competing in the multifamily arena.
..."Deals financed by CMBS are less likely to happen in primary markets, because there is more competition for loans in those markets," adds Thypin. "Players like big insurance companies, and foreign banks are less inclined to go out of major international cities likeNew York and San Francisco, so they offer more favorable terms in those markets to attract borrowers - terms that are better than what CMBS can offer," he says. "As a result, CMBS is restricted to smaller assets in primary markets and strong assets in secondary and tertiary markets."
And the CMBS market is limited in other ways. "Despite the CMBS market having made a comeback, it hasn't come back enough to allow for very large loans that get distributed across several different bond issues," says Thypin.
"Now, people are concerned that the market could freeze up or slow down, so it isn't operating consistently enough for a conduit lender to be able to make such large loans," he says. "The issue here is that there are not many large CMBS loans being made on single properties, because the risk is so concentrated in that single property/' adds Thypin.
"However, some large CMBS loans are being made on large portfolios," says Thypin. "For example, Wells Fargo, Deutsche Bank and Barclays recently teamed up to provide $1.4 billion in debt for a portfolio of 107 shopping centers owned by Blackstone, $1 billion of which was securitized," he says. "A CMBS lender can make such a loan and turn it into a single CMBS bond issue. These types of loans are being made today because collateral is spread out and so is the risk," says Thypin.
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Ben Carlos Thypin
I am currently the co-founder of Quantierra, the world's first data driven real estate brokerage and investment manager. In my former life as Director of Market Analysis at Real Capital Analytics, I worked with press outlets large and small to provide them with great data and insightful commentary. Here are some of the results of this collaboration. For the rest, please check out the News Archive.