CMBS lenders are putting together new deals, but issuance for the full year 2012 will likely once again fall below expectations.
Year-to-date, the U.S. commercial real estate market saw $22.5 billion in new CMBS issuance, according to Commercial Mortgage Alert, an industry newsletter. Somewhere close to $10 billion in additional deals might come to market in the coming months, according to Commercial Real Estate Direct, another industry publication. That would put 2012’s non-agency CMBS volume on par with 2011’s $32.9 billion, but fall $15 to $20 billion short of earlier expectations, according to Ken Cheng, managing director for CMBS new issuance ratings with Horsham, Pa.-based Morningstar Credit Ratings LLC.
“It’s looking like [issuance] is going to be flat with last year,” Cheng says. “I think part of it is probably the spreads that are keeping the cost of funding in the CMBS market relatively high. The pricing hasn’t gone down as much as people hoped to make it more competitive. Some of it is driven by what’s happening in Europe, a lot of geopolitical forces certainly affect this marketplace.”
As of July 26, spreads on triple A-rated, 10-year fixed-rate CMBS notes averaged 148 basis points, according to Commercial Mortgage Alert—10 basis points below their 52-week average. Spreads on triple B-rated, 10-year notes, however, were at 545 basis points.
“There are deals currently in the pipeline for the third quarter, but pricing and new issuance … changes monthly and sometimes weekly on any negative Eurozone or U.S. political news,” says Marisha Clinton, director of research for capital markets with Jones Lang LaSalle Americas Inc., a commercial real estate services firm.
Clinton notes that many analysts were expecting to see between $40 billion to $50 billion in new CMBS issuance in 2012, but most have already lowered their estimates given the market’s volatility.
That being said, there is still a possibility issuance may hit the $40 billion mark by December since historically lenders have stepped up new deals in the fourth quarter, according to Gerry Mason, executive managing director with real estate services provider Savills.
Getting funded
The good news is that CMBS financing continues to be available—in fact, for the past three months all of new CMBS issuance in the world occurred in the United States. The major CMBS lenders, including Bank of America, Cantor Fitzgerald, Wells Fargo, Deutsche Bank, JP Morgan and Morgan Stanley, have all been hitting their origination targets so far this year, according to Savills’ managing director Dan Gorczycki.
And they have been offering borrowers fairly generous terms: loan to value (LTV) ratios on CMBS deals now sometimes reach as high as 75 or 80 percent, with fixed interest rates in the mid-4 percent on 10-year notes, according to Shlomi Ronan, managing principal with Dekel Capital, a Los Angeles-based boutique real estate investment banking firm. While banks are willing to offer interest rates as low as 4.3 percent on the same properties, they are still capping LTVs at 70 percent and often require recourse, Ronan adds.
Meanwhile, life insurance lenders continue to gravitate toward class-A assets in core markets.
“They are very snobby about what they want,” says Gorczycki.
CMBS lenders have become more cautious about the amount of risk they are willing to accept since the last cycle, but they will fund stabilized assets in secondary and sometimes tertiary markets if the fundamentals are strong enough, albeit the risk will figure in their pricing, Gorczycki notes.
Most properties in recently funded CMBS pools have occupancy rates ranging from 85 percent to 95 percent, according to Morningstar’s Cheng. He notes that retail assets make up the bulk of most deals, ranging from 20 percent to 50 percent of the pools’ volume. Office properties come next, followed by smaller amounts of hotels, at approximately 10 percent of individual deal volume, and industrial, multifamily, self-storage and healthcare assets.