Commercial real estate financing is finally bouncing back. There was an upbeat mood in San Diego last month at the Mortgage Banking Association Conference. After years of malaise, the CMBS market is poised for a comeback.
In 2008, the volume for commercial real estate capital funding plummeted from the astronomic levels of 2006-2007 of more than $200 billion per year. The CMBS market dried up, and investors fled due to collateral quality fears. Capital markets volume in 2008-2011 was primarily multifamily product supported by Fannie Mae and Freddie Mac. During this strange market, product has been driven by entities in conservatorship. When a market is dominated by entities in conservatorship, I question its long-term viability.
But now CMBS lenders are back, and volume is projected to double in 2013 from $30 billion to more than $65 billion. Investors are flocking to buy securities collateralized by commercial real estate loans, and there is a high level of interest from global financial institutions in Europe and Asia. This is great news for the overall CMBS market.
Brokers and lenders are heavily competing for new loans. All collateral types are favored, with Fannie and Freddie still dominating multifamily. Interest rates remain low, LTV ratios are more conservative, and rating agencies are becoming more transparent. For borrowers, the good times are returning. With financing available, more of the maturities coming due are getting refinanced.
But there is still a fear that loan structures may become too aggressive again. Interest-only structures are making a comeback, not all real estate markets have fully recovered, and NOI projections may still be overestimated. The same rating agencies are still active, and investors should make sure the analytics behind the ratings are strong. Investors of CMBS tranches need to take a serious look at the new rating agency entrants in the market; more eyes on the collateral can only help.
Investor due diligence also needs to include a look at the borrowers in the loans they purchase, and how they handled the performance of their portfolios during the market’s meltdown. Did they give back properties? Did they file bankruptcy? Did they financially support their properties when NOI was stressed? If investors cannot get answers to their satisfaction, stay away. Real estate is cyclical; do not be fooled into thinking that issuer representations and warranties are a substitute for underwriting standards. Investors have learned the hard way that in tough times, not all issuers stand by their reps.
Overall, the news is good for CMBS finance. Debt capital has returned. Investors are eager to buy collateral. New CMBS shops are opening, and more loans are being made. It’s a good time to look at CMBS as an attractive investment, so long as those interested are willing to conduct the proper due diligence.
Dan Smith is the founder and CEO of Four Point Alliance, a commercial real estate advisory firm specializing in expert witness testimony and litigation support in real estate and capital markets lawsuits.