CMBS Slows as Maturities, Capital Vehicles Grow

Most CMBS specialists agree about a few facts for 2012: The 2007 loans will bring more maturities this year; fewer delinquencies are matching the better job market; and there is increased capital available for deals as life firms and banks step up lending again. Even though some disagree whether there will be more originations than 2011, which saw about $30 billion, that figure isn’t expected to change much this year.

Andrew Wright, CEO and managing partner of Tampa-basedFranklin Street, tells that from a structural delivery standpoint, he believes 2012 will be better than last year. “There’s a lot of capital flowing in, and the tremendous amount of maturities will make deals a lot more accessible to investors.”

About a trillion dollars of debt, loans done at the peak of the commercial real estate bubble, is maturing during the next three-to-four years, though CMBS represents a relatively small portion of the loans coming due. There’s about $79 billion of CMBS maturing in the remainder of 2012 and about $50 billion maturing in 2013.

Multifamily has the largest CMBS delinquency, headed by the $3 billion Peter Cooper Village/Stuyvesant Town deal in NYC. This year is a big year for multifamily loan maturities, with more than $7 billion scheduled to mature, according to Standard & Poor.

Wright says the maturities may affect new CMBS origination, just because of the amount of opportunity out there. He says this competition, matched by the lending that will be overwhelmingly available this year by institutions such as life insurance companies, should keep CMBS origination down to a low of $20 billion this year.

“At the peak there was more than $100 billion of CMBS being done annually, but if you compare to the bust years like 2008, I think $20 billion is a healthy number,” Wright says. “Given all the competition, and what we’ve been through with conduits the past few years, I think it’s attainable, but not at levels like $50 billion predictions like I’ve heard. You’ve got the return of healthy capital markets, with other products able to dominate the space better than the stringent box of CMBS.”

Richard Berlinghof, principal at New York City-based Faris Lee Investments, also said he’s “very upbeat” about CMBS this year. “We’ve seen activity increase dramatically since December,” he says. “We’ve seen a compression in pricing and more moderate underwriting. Standard’s aren’t weakening, but it’s easier to do transactions. Conduits are also starting to focus more on the secondary and tertiary markets.

He says he doesn’t see the increased capital flow from other lending as being in competition with CMBS. “They’re just different animals,” Berlinghof says. “Life companies and banks, for example, tend to have recourse, whereas securitized doesn’t. Also, insurance firms and banks are typically competing on a different type of product, it tends to be better quality and lower leverage – the CMBS sweet spot is higher leverage and the secondary markets.”

The only negative is that the securitized world is more sensitive to global volatility, he says. “If things are calm and steady, we’re fine, but one wild card like we saw last July can put CMBS to a grinding halt again,” Berlinghof says.

Tanya Little, founder and CEO of Dallas-based Hart Advisors Group LLC, tells that she disagrees with Wright’s $20 billion figure. Little says she believes originations will see a slight increase this year. Basically, the CMBS that is maturing will have trouble refinancing, and new capital from elsewhere will be needed, she says. “I’d anticipate about half of the maturities won’t be able to refinance,” Little says. Deals such as NYC-based Meridian Capital Group this month arranging a 10-year, $127 million CMBS loan to refinance a maturing CMBS loan for the 200 Public Square office tower in Cleveland will be the exception, Little says.

There are factors today preventing borrowers with maturities from extending, such as much more conservative underwriting and a desire for cash at the table by special servicers. Though the CMBS delinquency rate wasn’t too bad at 9% in 2011, Standard & Poor says that number should be closer to 9.5% to 10% this year.

However, the beginning of 2012 has seen some positive news on defaults. According to S&P, the percentage of CMBS paying off jumped sharply in February. By loan count, 64.9% of the loans paid off. The mantra of “more jobs, less delinquency,” seems to be standing, S&P maintains.

Also, resolutions are increasing, as vehicles such as partnering with a borrower to keep a property and note sales are seen as attractive to investors. Thus, the delinquencies are currently matching up to workouts. In January, which recorded the largest inflow yet of $6.4 billion of delinquent loans, $7.2 billion resolutions offset this, according to Moody’s.

Ann Hambly, founder of 1st Service Solutions based in Grapevine, TX, says this balancing out will continue in 2012. “Resolutions are continuing partly because of the bid-ask gap is shrinking,” she says. “More deals are being met in the middle.”

The one CMBS trend Hambly says this year will bring will be more bondholder lawsuits, as there will be more losses passing through the system. “These losses could have a huge impact on the industry, as the entities of the CMBS deal will change,” she says.

However, she says the resolutions will match up to defaults, and even new regulations won’t change deal volume. “There just isn’t that much of a difference with CMBS 2.0, or 3.0, or even 1.0,” Hambly says. “Water always finds its way around a rock. They can change a rule or a regulation, and people will find a way to get it done regardless, it’s how business functions today.”

Source:  GlobeSt


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