8.19.16: Dennis Suh Joins ValueXpress

Dennis Suh has joined ValueXpress to serve as a vice president for the commercial loan originations group. He will focus on originating CMBS conduit loans and agency loans in the broader national markets. Dennis comes with a background in originating fixed-rate conduit loans in core markets in the Northeast, Midwest and South/Southeast. Prior to joining ValueXpress, Dennis originated and underwrote CMBS conduit loans for Barclays Capital, Inc., UBS Securities, LLC and Credit Suisse, LLC in New York City.

“ValueXpress is extremely pleased to have Dennis Suh join the ValueXpress team,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Dennis brings with him a depth of knowledge and experience that will benefit our clients. CMBS conduit loans are probably the most complex commercial loan product out there and we at ValueXpress are successful because of our many years of in-depth CMBS conduit loan experience.”

“I am excited to bring my experience and contacts from the investment banking side of the CMBS business to my existing and new clients,” said Dennis. “Together with my talented colleagues at ValueXpress I have the ability to truly provide a ‘value-added’ proposition in terms of streamlining the CMBS loan process and negotiating the best loan structure and terms for my borrowers.”

You can reach Dennis at 212-883-6487 and dsuh@valuexpress.com.

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8.16.16: CMBS Pipeline Strong for Third and Fourth Quarters

Lower interest rates and stable markets are leading to predictions for strong CMBS conduit loan originations for the third and fourth quarters of 2016. The increasing velocity of CMBS loan closings is refreshing for CMBS professionals after poor first and second quarters in terms of low volume and poor profitability.

“Recent CMBS offerings have been very profitable compared with the last six months as a steady supply of CMBS issues faced rising spreads amid tepid demand from bond buyers that sapped profitability,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Now the reverse has occurred: Slower CMBS issuance had led to a shortage of CMBS securities, resulting in lower spreads and higher profits.”

This outcome is resulting in an interest rate bonanza for borrowers. Borrower rates, which were over 5% as recent as May, have fallen nearly 1% to 4.25%-4.50% for full-leverage cash-out refinance. Large balance, low-leverage loans in primary markets are seeing loan offers below 4.0%!

According to Commercial Mortgage Alert, $13.2 billion of CMBS transactions are in the works, an average of $6.6 billion per month compared with the $4.1-billion average for June-August. This is roughly $80 billion annualized, much higher than the $60-billion annualized pace through August.

Another reason for moving CMBS transactions out the door is so CMBS issuers can clear out loan inventory before risk-retention regulations become effective in late December.  For details on risk-retention, click here.

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8.10.16: Demand for Industrial Space in New Jersey Continues to Soar

In May 2016, CBRE Group, Inc. (CBRE) reported that developers saw a need for large industrial buildings in New Jersey and responded by developing speculative (not pre-leased) projects. While speculative development is very risky, tenants responded by gobbling up the space at a rapid rate. Demand actually exceeded the supply of new buildings. CBRE noted that five leases in excess of 500,000 square feet were recorded in the first quarter of 2016 compared with four new leases of that size for the prior 24 months.

CBRE recently updated its statistics for the N.J. industrial market and found that strong demand continued into the second quarter of 2016 as demand continues to outstrip supply. CBRE reported a vacancy rate of 7.2%, the lowest level recorded since 2007.

“It’s my 30th year in the industry, and I’ve never witnessed as much tenant leasing velocity as I have in the past 12 months,” said Thomas Monahan, executive vice president at CBRE. Some of the demand is attributable to companies relocating from New York, tax incentives offered by New Jersey and growth in e-commerce. In fact, e-commerce companies were responsible for 35% of the new leases in the second quarter, according to the CBRE report.

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ValueXpress Arranges $7,150,000 CMBS Conduit Loan for the Refinance of Two Drugstores in New Jersey and North Carolina

ValueXpress has arranged a $7.15-million CMBS conduit loan for the refinance of two free-standing drugstores, a Walgreens located in Glendora, N.J. and a Rite Aid located in Whiteville, N.C. Since the properties were under common ownership, the loan was made to two separate entities, but was cross collateralized.

The Rite Aid, located at 1728 S. Madison Avenue, Whiteville, North Carolina, began its life in 2004 as an Eckerd Drug Store. Rite Aid purchased Eckerd Drug Stores in June 2006 and rebranded the stores that it kept (such as this Whiteville store, while some stores were sold to CVS) to Rite Aid and this location remains a Rite Aid today.

The second store is a Walgreens located at 1301 Black Horse Pike, Glendora, New Jersey.

“The transaction was a challenge as both locations reported declining sales over time. Both have been affected by newer competition from Walmart and Sam’s Club,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

“We were able to get the transaction completed by properly structuring the loan to include a full cash flow sweep of the tenant rent to pay down the loan in the event that tenant sales fall below prescribed levels,” said Lawler Rodgers, a Commercial Capital Training Group graduate and President of Rockfish Funding, the mortgage broker on the transaction. This transaction represents the third deal that Lawler has completed with ValueXpress, and a fourth deal is approved and ready to be funded in the beginning of September.

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8.5.16: “Risk Retention” CMBS Deal Prices at Tight Spreads

A new issue CMBS conduit transaction priced on Thursday, August 4 at the tightest spreads since summer 2015. The issuers, Wells Fargo, Bank of America and Morgan Stanley, priced the long-term super-senior bonds from the $871-million offering at 94 basis points (bp) over swaps. This was significantly lower than the 108 bp level achieved in the prior offering that priced a week earlier. The price tightening continues a trend of declining CMBS spreads that began at the beginning of May after spreads on long-term super-senior bonds peaked at 173 bp over swaps.

The transaction was the first deal designed to comply with risk retention rules. As of December 24, 2016, CMBS issuers — or B-piece buyers in their stead — are required to retain 5% of transactions for at least five years. CMBS issuers can retain a “vertical strip” encompassing 5% of every tranche, a “horizontal” 5% strip at the bottom of the capital stack, or an “L-shape” strip that combines the first two options. The rules are part of the Dodd-Frank reforms passed by Congress after the financial markets collapsed in 2007-2008. Wells Fargo, Bank of America and Morgan Stanley elected to go the “vertical strip” route for this transaction.

Dealers noted the transaction contained mostly top-tier, low-leverage loans, and therefore, the pricing may not be indicative of market spreads for more typical CMBS deals, which contain a mix of high quality and lesser quality loans with a typical average loan-to-value of 65.0% versus the 55.6% reported in the Wells transaction. The next few deals scheduled to come to market continue the theme of lower leverage/higher quality loans in the issues, so it may be a few weeks until the market gets pricing indications for a more typical higher leverage CMBS transaction.

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8.4.16: Meanwhile, Tight CMBS Spreads and Low Treasury Yields Provide Great Rates for Borrowers

After long-term super-senior CMBS bonds peaked at 173 basis points (bp) over swaps in May 2016, spreads have steadily declined to 94 bp when Wells Fargo, Bank of America and Morgan Stanley priced the long-term super-senior bonds from the $871-million offering on Thursday, August 4. Rates to borrowers have declined dramatically in response. Market participants point to limited CMBS supply as a contributing factor to tighter pricing. At the end of July, only $39 billion of CMBS deals have been issued compared with $71.9 billion in the year-earlier period. In addition, bond markets in general are stable and investors continue to seek investments that can provide a decent yield in relation to risk. CMBS securities are providing a relatively good yield compared with other debt investments right now.

Typically, when CMBS spreads decline, Swap yields and Treasury yields rise to provide an overall yield “floor” for investors. Recall that the overall yield to an investor in a new CMBS issue is comprised of adding the CMBS bond spread to the Swap spread. In the Wells Fargo, Bank of America and Morgan Stanley CMBS deal, the 10-year swap rate was 1.37% and the bond spread was 94 bp (0.94%). Therefore, the yield to investors for the long-term super-senior bonds was 1.37% + 0.94% = 2.31%. This level is well below the floor of 3.0% that has generally prevailed during 2015-2016.

This outcome is resulting in an interest rate bonanza for borrowers. Borrower rates, which were over 5% as recent as May, have fallen nearly 1% to 4.25%-4.50% for full-leverage cash-out refinance. Large balance, low-leverage loans in primary markets are seeing loan offers below 4.0%!

“We expect to have very busy third and fourth quarters,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have not seen rates this low in over a year-and-a-half.”

 

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8.1.16: Trepp: CMBS Delinquency Rate Moves Higher Again in July

CMBS loan delinquency rose in July to 4.76%, up 16 basis points (bp) from June, according to Trepp. The July delinquency rate is 61 bp above its multiyear low of 4.15% recorded in February 2016. The delinquency rate was negatively impacted by loans unable to pay off at maturity, thereby being classified as delinquent. As previously reported, a significant amount of CMBS loans written in 2006 at the peak of the CMBS market are maturing now. Many of these loans are not meeting current underwriting standards to generate enough loan proceeds to pay off the loan balance at maturity.

The problem worsened due to the CMBS market pullback in spring 2016. As b-buyers pushed back on lesser quality loans and market spreads moved out, making loans less profitable, lenders became increasingly conservative in terms of loan underwriting. Maturing loans that might have been approved for adequate proceeds to pay off existing debt found their loan proceeds cut to levels that required too much cash equity to close or were turned down altogether. Mezzanine lenders that were supposed to fill the gap have not participated materially in solving the problem.

Vacancy by Property Type – July 2016

 

Sector

  June

2016

  July

2016

  %

Change

Industrial 5.95% 5.63% -0.32%
Lodging 3.25% 3.12% -0.15%
Multifamily 2.35% 2.51% +0.16%
Office 5.76% 6.23% +0.47%
Retail 5.72% 5.76% +0.04%

Source: Trepp

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