Interesting Times

By Commercial Real Estate Direct Staff Report, 10-3-10

A total of $4.8 billion of private-label CMBS transactions was issued during the first three quarters of the year, and based on what's currently in the pipeline of potential deals, the full year ought to see total issuance of roughly $11 billion.

The volume of issuance this year is a sharp increase from the $729 million of issuance during the same period last year, and $2.8 billion for the entire year. However, it's still far off the market's 2007 peak of $230.5 billion.

But market conditions are becoming more favorable for both lenders and borrowers, which should result in a substantial boost in issuance next year.

CMBS spreads in general have tightened substantially from their peaks early last year. Generic AAA bonds with 30 percent subordination are trading at roughly 300 basis points more than swaps. That's down from roughly 500 bp over swaps at the beginning of the year and the peak of more than 1,100 bp over swaps early last year.

Spreads for recently issued bonds have been substantially tighter. For instance, a 10-year AAA class from GS Mortgage Securities Trust, 2010-C1, priced at 135 bp over swaps. Standard & Poor's has estimated that the cost to fund loans through a CMBS deal at current spreads is about 200 bp over swaps. Loans, meanwhile, are being written at rates that equate to roughly 225-250 bp over swaps.

Meanwhile, Treasury yields have dropped sharply as well, which is good news for borrowers since mortgage rates are generally benchmarked off such bonds. The 10-year rate is down to 2.53 percent from 3.85 percent at the beginning of the year. That means that borrowers of stable properties could line up 10-year debt with rates in the 5 percent range or less. And lenders can still profitably sell those loans on the secondary market through CMBS.

The prospect of being able to profit from writing and securitizing loans has prompted a number of lenders to ramp up their origination programs. Among the more recent was Principal Real Estate Investors, which has committed to originate loans that it would contribute to deals issued by Wells Fargo Securities, which itself has geared up its lending operation.

The tighter spreads and lower risk-free rates could mean issuance next year balloons to $35 billion. That's according to regression analysis by S&P, and assumes interest rates and bond spreads remain relatively low. The rating agency determined that if bond spreads tighten more than 25 percent from current levels, and Treasury rates remain unchanged, issuance next year could total $45 billion. But if they widen by more than 25 percent, issuance would drop to $4 billion.

S&P noted that $40 billion of CMBS conduit loans mature next year, as do possibly $1.4 trillion of commercial real estate loans held by banks. So lenders will have plenty of opportunities to lend.

So far this year, JPMorgan Chase has been the market's big kahuna. It received credit for running the books on three transactions totaling $1.7 billion. It contributed $1.4 billion of loans to CMBS deals.

The investment bank has another multi-borrower CMBS transaction in the market that ought to price next week. Plus it will be participating in the securitization of some $2 billion of debt that would facilitate the restructuring of Extended Stay Hotels Inc.

Meanwhile, RBS, Deutsche Bank and Wells Fargo are said to be working on multi-borrower deals that should price before the end of the year.