They’re back. Even as delinquency rates continue to rise on existing CMBS loans, a new wave of commercial mortgage backed securities has begun to bring a taste of liquidity back to a parched market. But before you say, "Oh no, here we go again," consider this: loan originators are focused on well-leased, well-located properties with seasoned sponsorship, and loan terms are stringent.
The accounting firm Deloitte expects that there will be $8 to $30 billion in new CMBS this year (as opposed to $3 billion in 2009). That is still a fraction of the $230 billion in debt issued in 2007. Industry observers are encouraged, though, because while the first quarter of the year saw several single-borrower transactions, Spring brought the prospect of multi-borrower financings for the first time in two years.
According to Commercial Mortgage Alert, non-recourse fixed rate loans being offered have terms of five, seven and 10 years; maximum LTVs of 70 percent; minimum debt service coverage of 1.30 times; and maximum amortization of 30 years.
Chuck Elfsten, president/owner of Ocean Pacific Capital, said that "we’re surprised to see it come back so quickly. We’re glad to see it; it’s another tool to work with." CMBS are very different than three years ago, he said, "a much better, safer version," he said. In this firm’s recent experience the market seeks: $10 million minimum, only Triple A product with Triple A borrowers. Industrial, office, then retail are fine, no land and no projects in the middle of nowhere. Rates can range from 5.5 to 7.25 percent.
Patrick C. Sargent
Patrick C. Sargent, president of the CRE Finance Council (formerly the Commercial Mortgage-Backed Securities Association) and partner in the law firm Andrews Kurth LLP, said that this organization’s members "want to bring liquidity back to the marketplace." The good news is that there were three securitizations in December, for single-borrower, multi-property deals, with 50 to 60 percent LTV. He acknowledged, however, that there are "not a lot of borrowers in that category." Now at least a half-dozen financial institutions have set up or are in the process of setting up new conduits for $10 to $75 million loans with six to 7 ½ percent coupons, he reported.
Those institutions include RBS, Deutsche Bank, Bridger Commercial Funding, Wells Fargo, PNC Bank, Morgan Stanley, Bank of America, Citigroup, Goldman Sachs and Cantor Fitzgerald.
"People are stepping in cautiously," he said. "The biggest issues are valuations and the bid-ask gap." Prospective borrowers should expect lower proceeds, more basic underwriting, escrows, a focus on in-place rents, fewer interest-only loans and more stringent adherence to loan document covenants, he advised.
Commercial real estate is "on a recovery route," he said. "It will be painful; there will be more losses. We’re in a transition phase right now. But there’s plenty of new money out there and the bid-ask gap is starting to narrow. There’s almost a frenzy again for good properties."
Single, Multi-Borrower CMBS
Keystone Property Group, an opportunistic office investor, completed a $53.5 million refinancing for Keystone Summit Corporate Park, a Class A corporate campus the company had purchased in September 2008 in a submarket of North Pittsburgh, Pa. The CMBS financing enabled Keystone to cash out two-thirds of its equity. Capital advisory firm Ackman- Ziff Real Estate Group represented the company.
"We decided to sequence the placement by identifying the B note investor first, then the A note investor," said Simon Ziff, president of Ackman- Ziff. "If we placed the 60-75 percent piece first, there would be better certainty on executing the total loan and it would be on better terms."
Regarding the return of CMBS, he said, "We all expected it to come back at some point," adding that while "the craziness won’t happen overnight," technology has improved enough to hopefully help protect the bond investors while allowing for the meaningful ramp-up we are experiencing.
By Spring of this year, blended rates were in the sub-seven percent range, a drop from more than eight percent six months prior to that, he said. Ziff also believes that as the CMBS market picks up steam, so too will the bridge financing market. Don’t expect the street to shift to significantly riskier financing, though; Ziff noted that "these are very safe loans, at mark-to-market values."
Florida-based Flagler closed on a $460-million CMBS loan, securitized by Banc of America Securities. The financing covers 44 of the company’s office and industrial properties throughout the state. Last year the company completed more than $1.9 billion of financing.
Vincent Signorello, Flagler’s chief investment officer, explained the renewed interest in CMBS: "There were so many players on the sidelines for such a long period of time, they needed to exercise their capital and their human capital," he said. "Yields are attractive as compared to other types of securities. Finally there’s some momentum." He observed that a handful of single-borrower trades broke the ice at the end of ’09, proving that investors were out there.
The fact that a number of banks are originating loans, intending to put them in conduits and seeming to be willing to commit principal as well, are better signs for the market than the few CMBS transactions that took place in 2009, he said.
Still, in the near term it will be difficult for non-institutional quality properties to get financed, he noted. Securitized or not securitized, lenders are seeking stabilized properties in primary markets with strong sponsorships. "The first money out the door is going after the most attractive assets," he said. "Then we’ll see the market start to consume product that is not nearly as core. I hope there’ll be support for the middle market."
In the retail sector, Ramco-Gershenson Properties Trust , a REIT based in Farmington Hills, Mich. that owns 88 shopping centers totaling some 19.8 million square feet, closed on a new $31.3 million CMBS loan with J.P. Morgan, secured by its West Oaks II shopping center in Novi, Michigan and its Spring Meadows Place center in Holland, Ohio. The $31.3 million financing represented a 60 percent LTV, and has a 10-year term with a fixed interest rate of 6.5 percent.
RBS Commercial Funding’s $309.7 million commercial mortgage-backed securities deal is believed to be the first multiple-borrower conduit sale in two years. The securitization, backed by 81 commercial real estate properties (mostly office and retail) was in Texas, New York, Missouri, Wisconsin and New Jersey. RBS and Nataxis are underwriting the sale of securities. The securities are not being sold under the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). The TALF program expired for Legacy CMBS in March 2010. The top-rated tranches were priced at less than 100 basis points over spreads; the lowest rated, or BBB-rated tranche, was expected to price at a spread of 425 basis points over spreads.
In the lest-we-forget department: According to the research firm Trepp, LLC, CMBS delinquencies (defined as 30 days or more in arrears or in foreclosure) rose above seven percent in March. (Office had the lowest delinquency rate, at 4.73 percent, with industrial at five percent.) The irony, however, is that spreads dropped an average of 40 to 45 percent during that month and spreads on the highest rated bonds dropped 105 to 115 basis points.