SAN DIEGO — While there is no doubt that the lending climate for commercial real estate has improved dramatically over the past year, the industry still faces headwinds: tepid job growth, lagging real estate fundamentals in many property sectors, the uncertain effects of financial regulation reform, and a growing sense that inflation is lurking just around the corner. What follows are some sound bites from Day 1 of the Mortgage Bankers Association’s Commercial Real Estate Finance and Multifamily Housing Convention & Expo.
— Jack Cohen, CEO of Cohen Financial, speaking in the “CMBS Outlook” session about how the commercial real estate market can’t completely heal until winners and losers emerge.
“My belief is that that the reset button can’t be hit until this industry takes its losses. The problem that exists is that the institutions are more capable to take their losses, both intellectually and economically. They’re creating revenues, they’re creating reserves, they’re writing stuff off.
“But the guy who has a $5 million shopping center and a $4 million loan, and who has $1 million in it and is going to lose $3 million or $4 million — that guy is toast.
“But it has to happen. This business is about risk. You are supposed to make a lot of money and lose a bunch of money. Guys who lose leave the game. Guys who win keep coming. So, people are going to have to take some losses. Until they do, we’re not done.”
— Brian Olasov, managing director with law firm McKenna Long & Aldridge, delivers a pointed question on loan delinquencies during the “CMBS Outlook” session.
“CMBS loan delinquencies are about 9%, with banks about half that amount. The delinquency rates for the American Council of Life Insurers as well as Fannie Mae and Freddie Mac are about one-tenth of the bank rate.
“Is there a structural inferiority in underwriting in CMBS, or is it a selection bias in the nature of the projects? Or is it that CMBS might be the most honest in terms of accounting for its problems?”
Dennis Schuh, managing director, J.P. Morgan Securities LLC, addressing the question of why the loan delinquency rates are much higher for CMBS loans than agency, bank or life company loans?
“There is absolute transparency around CMBS. With every loan you know what the cash flow is, you know what the value is, you know where the property is located and who are the top three tenants. Nobody knows what’s on the banks’ balance sheets. Nobody knows what’s in the life insurers’ portfolios. Oftentimes, a bank will make a self-help loan and just roll it over again.
“There are a couple of big loans skewing those delinquency numbers a little. (For example, Tishman Speyer and BlackRock Realty defaulted on a $3 billion loan on Stuyvesant Town and Peter Cooper Village, two apartment complexes in Manhattan.) CMBS always was a slightly higher-leverage market than the portfolio lending business, and I think as a result we are seeing slightly higher delinquencies.”
— Richard Schlenger, director, Citigroup Global Markets Inc., explains how risk retention (CMBS originators could be required to retain 5% of the loan) as contemplated under the Dodd-Frank bill could result in unintended consequences
“If we end up having to do it, it’s just going to end up costing the borrowers more because I don’t think we would exit the business. But there is an additional cost to it. We’re not really worried too much about it today. We see it as a big issue, but it’s still to be determined. When is it going to occur, and what is it going to look like? Meanwhile, we’re stilling cranking out loans and we still want to sell them.”
— John Courson, president and CEO of the Mortgage Bankers Association, addresses the impact of financial regulation reform on commercial real estate finance in his opening address to members.
“The Dodd-Frank legislation is really only the skeleton. Now we’re into the meat grinder of rule making where we really have to put meat on those bones. There are almost 300 rules that will be produced out of that legislation, and 100 of them are focused directly on our industry. We’ve sent over 100 letters already to regulators advocating your position.”
— Compiled by NREI Editor Matt Valley