Commercial mortgage rates increased a tad during the normally sleepy month of August, according to the Barron's/John B. Levy & Co. National Mortgage Survey of large institutional lenders. This was supposed to be the height of the summer doldrums, when loan activity grinds to a halt. But one couldn't tell that from the production levels of a number of survey members. A small handful issued new commitments at record levels for their respective firms. None of the record setters saw any particular pattern or reason for the new records except to note that borrowers jumped back into the market in July when interest rates showed a brief sign of moving south.
In spite of the records at selected firms commitment volume and loan demand are still uneven. In contrast to the record setters, a number of other survey members report their pipelines as respectable, but surely not overwhelming.
With their large amounts of new loan production in July and August, a few lenders note that they are getting close to their 1996 targets. As a result, they are becoming less aggressive or, in the words of one participant, "standoffish." Competing lenders are surely hoping that this new less-aggressive attitude might lead to an increase in spreads, but that surely doesn't appear on the horizon. Several life insurance companies note that their cashflows had picked up significantly, which will lead to an increasing interest in the commercial mortgage arena.
On the whole-loan side, institutions continued to favor apartment loans as they have for the last several years. But this month, several survey members indicated an almost "burning desire" to expand their industrial loan portfolios. Most lenders are underweighted in the industrial and warehousing arena and are salivating for the opportunity to do a large portfolio of these buildings. Because warehouse loans do not command high dollars per square foot, it is difficult for a lender to accumulate a significant portfolio of these attractive assets. Moreover, finding an industrial park or a group of buildings is even more difficult. This leads lenders to be even more competitive when they do find a multitenant park that meets their investment criteria.
The commercial mortgage-backed securities (CMBS) market was reasonably quiet during August but appears to be gearing up for what should be a whopping fall season. The September transaction to watch appears to be the securitization of the junior pieces from Confederation Life to be sold by Lehman Brothers. Two deals from Nomura are also on tap including another of their famous "mega-deals." Based on deals in the pipeline, it appears that 1996 volume will be well in excess of the $18 billion to $20 billion predicted by most analysts.
A number of large life insurance companies are proposing to securitize a portion of their commercial mortgage portfolios during the fall. The purpose of the securitizations is to gain additional liquidity to do more commercial mortgage originations, as well as increase the yields on their existing transactions. They intend to keep the junior tranches and sell the most senior pieces. Although this can be done in the CMBS arena as successfully demonstrated by Protective Life Insurance Co. and Penn Mutual, some insurers are also investigating selling parts of their portfolios to other lenders in direct private transactions. Often mentioned as one of the most aggressive buyers with a "voracious appetite" is the behemoth Metropolitan Life.
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