At the beginning, the commercial mortgage-backed securities market saw its share of questionable lending standards and players who flashed white-hot and then disappeared, such as Nomura Securities and Amresco. With time, CMBS and the rest of the commercial real estate lending market have matured, evidently returning to tested fundamentals by leading lenders. Relationships matter, experience is key and longevity counts, they say.
Commercial banks have joined Wall Street investment houses at the forefront of CMBS lending. With them have come more traditional values and a different mindset that emphasizes ways to ensure durability in a market normally full of volatility, cyclical chaos and intense competition.
Size counts One such financial institution, which in the past four years became a major player in CMBS lending, is New York-based Chase Commercial Mortgage Banking. Its parent, Chase Manhattan Bank, with more than $400 billion in assets, is one of the nation's three largest banking institutions.
While operating in a very competitive environment, Chase Commercial Mortgage has already closed an impressive number of loan transactions with many of the leading names in retail property: Vornado, Simon and Kimco, among others. Of its $2 billion in loan originations in 1999, Chase provided approximately $642 million to retail property owners in 20 transactions.
There's no reason to believe that 2000 won't bring similar or larger levels of activity for Chase, because the overall CMBS market prognosis is positive. Many investors and analysts say the CMBS market is "heading toward more favorable circumstances," reported The Wall Street Journal in January, as rising interest rates have strengthened outstanding CMBS by limiting the issuance of new securities.
Continued diversification of the real estate assets that back the securities are adding safety, and expansion of the CMBS investor base is expected to continue, especially if pension fund investment rules change this year, as expected, to allow institutional investors to buy a broader range of CMBS product.
This is a vast improvement from conditions at the end of 1998, when the CMBS market fell out after the global financial markets crisis. CMBS issuance peaked in 1998 at $100 billion before the crisis, went down significantly in 1999 to $65 billion, and is expected to reach $40 billion to $50 billion this year, according to industry sources.
High-ranked loan servicing portfolio Since its inception in 1995, Chase Commercial Mortgage has originated $8 billion of commercial loans for CMBS. Chase maintains a servicing portfolio of more than $10 billion, making it one of the top 10 loan servicing companies in the United States, according to the Washington, D.C.-based Mortgage Bankers Association. Besides its New York headquarters, Chase has offices in Los Angeles,and Dallas and a staff of more than 70 responsible for underwriting, closing and servicing.
"Our focus has always been on quality transactions," says Rochelle Dobbs, managing director and head of origination of the CMBS group, whose investors aren't arguing with the Chase philosophy that better quality real estate and stronger sponsorships create higher-quality securities. Last spring, investors snapped up the Chase/First Union Capital Markets' joint venture $1.1 billion offering, prompting some industry analysts to say that the's strength - priced at some of the tightest spreads seen in the market in 1999 - was instrumental in establishing commercial banks as the new dominant power in the reconstituted CMBS market.
Investors have favored CMBS offered by commercial banks over other issuers because they believe banks such as Chase are more committed to the market and have stronger underwriting standards than their Wall Street competitors.
Dobbs says investors have correctly perceived that "we have a longer-term view than someother securitized lenders" and will consequently be in the market to stay.
To continue to be a major player, Chase has to remain competitive in an unbalanced market that, once again, is witnessing too many lenders with too many dollars and too many expectations chasing after more deals than the market can supply. "In this type of environment, you have to focus on your core client base - those with whom you have always done a lot of business," Dobbs says.
Besides Wall Street, Chase is also competing with other financial institutions and life insurance companies who have re-entered or changed roles in the market and are offering traditional loans as well as CMBS. "The lines are blurred today," she says.
Chase is staying ahead of the curve by offering borrowers a wider choice of product.
"What I believe you will see this year is a greater demand for a wider product array within the CMBS market. CMBS is expanding to include floating rate loans, A-B note structures and a considerable amount of bridge money," Dobbs says. "Fixed-rate loans had been the bread-and-butter of CMBS, but client demand and a deepening market have led to increased product variation."
Experience counts "Although our business is highly transaction-based, we have a tremendous amount of real estate experience," Dobbs says. "Most of the senior people in our group have been involved in real estate lending for more than 15 years and are adept at differentiating between a strong deal and a weaker one. Once we have identified a better-quality transaction, we put together some of the most competitive terms in the market."
While broadening its loan products, Chase intends to remain true to the basics that have served it well in the past four-plus years. "We have always stuck to the fundamentals," Dobbs says.
"By and large, within our conduit deals and our larger transactions, we have worked with clients with very strong management, sponsorship and financial capacity, such as the larger REITs. Even in conduit transactions where we have no prior relationship with a client, we look for strength and experience of sponsorship," she says.
An important part of Chase finding a quality deal is for it to get to know the asset as well as the client behind it. "Within the real estate transaction, we have maintained very sound underwriting practices, and we make sure we have familiarity with the asset, a comfort level with tenants and a knowledge of the market," Dobbs says.
Getting to know the tenant In the retail arena, Chase considers tenant sustainability within a center, occupancy costs, tenant sales and overall tenant strength as important lending criteria. "We approach an asset as if we were considering it for our own portfolio," Dobbs says.
With all of the emphasis on finding the quality deal, Dobbs admits that the retail property sector currently poses some challenges. "It remains harder to find better quality deals in retail," she says. "We have to ask, 'Who are the survivors?' " Dobbs says that, as a retail lender, Chase also pays attention to the possibility of additional consolidation among retail property owners.
When it comes to looking hard at a property, Chase has to determine whether a set of tenants - and the sponsor - represent today's market survivors in their categories, and it evaluates the relationship between sponsors and tenants. Location is another key factor in determining quality. "We have to be sure that if there is a change of flavor - say, if it is infill - that there is enough traffic to support replacement tenants," she says.
Chase has typically stayed away from stand-alone tenants, especially those who are non-investment grade, Dobbs says. The lender has also shied away from unanchored retail projects unless they have a strong track record and are supported by other retail properties in close proximity. "It's also common sense for us to avoid Class-B malls and tertiary locations."
Chase's favored retail properties are regional malls, grocery/drug, urban locations and shopping centers, "where we like to see at least three or fournational or core draws," says Dobbs.No matter the property type, the Chase goa l is to keep quality as the vital part of everything they do. "This is recognized by our clients, who benefit from the blend of a user-friendly origination process and a superior execution," she says. "More than half of our business is repeat business. Further, many of our clients remain loyal to us for every deal they do."
Who's who of loan relationships In recent retail activity, Chase closed an $82 million loan to Vornado Realty Trust for Rego Park Plaza, a 343,049 sq. ft. power center in Queens, N.Y. The center is 100% occupied by five national tenants: Sears; Circuit City; Bed, Bath & Beyond; Marshall's; and Old Navy. The loan closed in May 1999. "We knew the strength of that sponsorship, and the center has the No. 1 Sears store in the nation," Dobbs says.
For Simon Property Group, Chase provided acquisition financing of three malls: Auburn Mall in Auburn, Mass.; Apple Blossom Mall in Winchester, Va.; and Greendale in Worcester, Mass.
In partnership with First Union, Chase loaned $312 million in October 1999 to Simon Property Group for Mall of America, Bloomington, Minn., considered by many the premier super-regional mall in the United States, with anchors Bloomingdale's, Macy's, Nordstrom, Sears and a seven-acre entertainment park.
Dobbs says that Chase provided $272 million to the Kimco Income REIT when it was launched. "For a company that had not borrowed in the secured market for some time, the transaction was particularly easy for them," she says.
E-business to come Chase Commercial Mortgage does not yet have a strategic online presence in which to market or originate loans and service e-savvy clients, but Dobbs says things should change by the end of the year.
"E-commerce is a top initiative at Chase, from the chairman's office all the way down through the bank," she says. "Suffice it to say that it will be a significant initiative for us, whether it ends up being part of another online company, a stand-alone Chase presence or some combination of the two.
"We realize a significant number of people want to do business (online), and we intend to be there," Dobbs says, with the resolve of a market player who's come to win.