Finance CMBS
Jan 1, 2008
By: Amanda Marsh, Associate Editor
The only thing certain in the CMBS market is that nothing is certain, leaving market experts scratching their heads as they enter 2008. "In years past, we were able to look ahead, but this is the foggiest year yet," said Tad Philipp, managing director for Moody's Investors Service. Usually, there is a lot of momentum going into the first quarter, but during the fourth quarter, issuers were operating at 25 percent or less of their pace, compared with pre-August origination levels.
Moody's does predict that 2008 CMBS issuances will be halved from last year's $220 billion. Philipp added that most of this year's issuances will occur during the second half of the year. Fitch Ratings has predicted a similar reduction.
When he returned to work after Labor Day, Woody Heller expected a backlog of inventory and an "ugly fourth quarter" that would return to normal by January, albeit in a slightly more conservative state. "It's clearly taking longer, and January is an ambitious goal," said the executive managing director & group head of Studley Inc.'s capital transactions group.
The market has not had such tight quarters since the early 1990s, when lenders were conservative with loan-to-value ratios, cash flow and underwriting. "We will see more concern toward where money is going," said David McLain, chief investment officer for Palisades Financial.
CMBS lenders have pulled their commitments from many transactions and have restructured rates, spreads and equity requirements. In turn, pressure on borrowers for equity on mezzanine tranches and lower loan proceeds has increased. "Deal flow has slowed to a crawl, and (transactions) are taking longer to close," McLain said, adding that many lenders are trying to sell non-default loan positions at a discount to move product off their balance sheets.
Many lenders are waiting for the capital markets to settle before signing off on new loans, noted Susan Merrick, managing director & head of Fitch Ratings' CMBS group. Several CMBS lenders face sizable losses, while others are not quoting deals due to spread volatility. And for those still quoting deals, marketwide confidence in price points is low, added Tom McManus, chairman & CEO of Cushman & Wakefield Sonnenblick-Goldman L.L.C.
Conduit lenders have fallen out of favor with borrowers because they have changed deals so dramatically, according to David Rosenberg, managing director for Meridian Capital Partners L.L.C. "The borrowers will be sensitive about getting involved with them again." In fact, some borrowers have sworn off using conduits ever again, noted David Csontos, senior vice president for GVA Worldwide and a member of its capital markets practice group. "Conduits were a well-oiled machine that knew how to price investment-grade tranches," he said. "I'm not sure how long it will take for them to efficiently access the securitized pool of investors."
Regardless, the pool of CMBS players has not contracted, as most are affiliated with deep-pocketed institutions, though Philipp said he "wouldn't be shocked to see some leave."
For now, balance-sheet lenders, especially life companies and smaller banks, are enjoying their time in the sun. Still, liquidity is an issue. "You will have people who are unable to refinance," Merrick said. "There's not enough capital in these smaller bank and life companies to absorb the capacity." Single loans worth more than $100 million will also have a more difficult time with floating rates, added Steve Kohn, president & principal for Cushman & Wakefield Sonnenblick-Goldman.
Delinquency Upsurge
Leading executives also foresee an increase in CMBS delinquencies this year. "The economy is softening, and higher costs will have a negative effect on delinquencies," Philipp said. The first tangible evidence of value inflection happened in September, when Moody's found that commercial property prices fell 1.2 percent from August's figures; delinquencies typically increase as prices decline.
Fitch posited that CMBS loan defaults will increase more than 50 percent by year-end, even with strong real estate fundamentals continuing, and they may double if the broader real estate markets show signs of weakness. Bond defaults, however, are projected to remain low.
So far, underlying fundamentals have remained strong, but weakened demand may occur if the economy takes a turn. "Economists have gone from dismissing a recession to seeing it as a realistic (situation)," Philipp said, concerned that the other shoe will drop in the capital markets as availability of capital, higher prices for capital and reduced prices for property can result in rising delinquencies.
By: Amanda Marsh, Associate Editor
The only thing certain in the CMBS market is that nothing is certain, leaving market experts scratching their heads as they enter 2008. "In years past, we were able to look ahead, but this is the foggiest year yet," said Tad Philipp, managing director for Moody's Investors Service. Usually, there is a lot of momentum going into the first quarter, but during the fourth quarter, issuers were operating at 25 percent or less of their pace, compared with pre-August origination levels.
Moody's does predict that 2008 CMBS issuances will be halved from last year's $220 billion. Philipp added that most of this year's issuances will occur during the second half of the year. Fitch Ratings has predicted a similar reduction.
When he returned to work after Labor Day, Woody Heller expected a backlog of inventory and an "ugly fourth quarter" that would return to normal by January, albeit in a slightly more conservative state. "It's clearly taking longer, and January is an ambitious goal," said the executive managing director & group head of Studley Inc.'s capital transactions group.
The market has not had such tight quarters since the early 1990s, when lenders were conservative with loan-to-value ratios, cash flow and underwriting. "We will see more concern toward where money is going," said David McLain, chief investment officer for Palisades Financial.
CMBS lenders have pulled their commitments from many transactions and have restructured rates, spreads and equity requirements. In turn, pressure on borrowers for equity on mezzanine tranches and lower loan proceeds has increased. "Deal flow has slowed to a crawl, and (transactions) are taking longer to close," McLain said, adding that many lenders are trying to sell non-default loan positions at a discount to move product off their balance sheets.
Many lenders are waiting for the capital markets to settle before signing off on new loans, noted Susan Merrick, managing director & head of Fitch Ratings' CMBS group. Several CMBS lenders face sizable losses, while others are not quoting deals due to spread volatility. And for those still quoting deals, marketwide confidence in price points is low, added Tom McManus, chairman & CEO of Cushman & Wakefield Sonnenblick-Goldman L.L.C.
Conduit lenders have fallen out of favor with borrowers because they have changed deals so dramatically, according to David Rosenberg, managing director for Meridian Capital Partners L.L.C. "The borrowers will be sensitive about getting involved with them again." In fact, some borrowers have sworn off using conduits ever again, noted David Csontos, senior vice president for GVA Worldwide and a member of its capital markets practice group. "Conduits were a well-oiled machine that knew how to price investment-grade tranches," he said. "I'm not sure how long it will take for them to efficiently access the securitized pool of investors."
Regardless, the pool of CMBS players has not contracted, as most are affiliated with deep-pocketed institutions, though Philipp said he "wouldn't be shocked to see some leave."
For now, balance-sheet lenders, especially life companies and smaller banks, are enjoying their time in the sun. Still, liquidity is an issue. "You will have people who are unable to refinance," Merrick said. "There's not enough capital in these smaller bank and life companies to absorb the capacity." Single loans worth more than $100 million will also have a more difficult time with floating rates, added Steve Kohn, president & principal for Cushman & Wakefield Sonnenblick-Goldman.
Delinquency Upsurge
Leading executives also foresee an increase in CMBS delinquencies this year. "The economy is softening, and higher costs will have a negative effect on delinquencies," Philipp said. The first tangible evidence of value inflection happened in September, when Moody's found that commercial property prices fell 1.2 percent from August's figures; delinquencies typically increase as prices decline.
Fitch posited that CMBS loan defaults will increase more than 50 percent by year-end, even with strong real estate fundamentals continuing, and they may double if the broader real estate markets show signs of weakness. Bond defaults, however, are projected to remain low.
So far, underlying fundamentals have remained strong, but weakened demand may occur if the economy takes a turn. "Economists have gone from dismissing a recession to seeing it as a realistic (situation)," Philipp said, concerned that the other shoe will drop in the capital markets as availability of capital, higher prices for capital and reduced prices for property can result in rising delinquencies.
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